January 14th, 2009

Treasury rally underway, but stock reversal looming?

Recent equity market weakness has shined the spotlight on Treasuries once again as investors are flocking to the safety of the Fed backing.  With deflation as the current theme, low yields don't seem to be a concern.  Instead, the focus is on capital preservation. 

Pathetic (yes I said it) retail sales data was the catalyst behind bond buying, but mid-day buying was likely attributable to a short squeeze as volume remains on the light side.  Also, despite what appear to be much better investment prospects in corporate bonds, speculation over corporate defaults have managed to keep Treasuries in favor. 

The up-move was supported by speculation of Bernanke's comment regarding the possibility of the Fed to buy longer dated bonds.  Fed member Plosser repeated the "threat" today.  The imminent prospect for rampant inflation on the heels of the bailouts and loosening credit markets have been put on the back burner.  Additionally, concerns over excessively ample supplies of fixed income instruments seem to have faded in the near term.  With the next note auction not taking place until the end of this month, it has fallen victim to the "out of sight, out of mind" mentality. 

On a brighter note, Minneapolis Federal Reserve Bank President Gary Stern claims that the economic rebound isn't far away but notes that what he deems to be healthy growth won't be seen until the middle of 2010.  According to Stern, the recession is likely to linger through mid-year before recent monetary policy takes hold. 

The March 30-year bond managed to reach our resistance level but the 10-year note has yet to do so.  The direction of Treasuries from this juncture is highly dependent on that of equities.  With the major indices slightly oversold, it seems as though we could be in store for a corrective bounce in stocks and possibly a corresponding pullback in Treasuries.  Although, with so many technical and fundamental uncertainties in Treasuries, I prefer to not pick an immediate direction. 

Resistance in the 10-year note is near 128'22, the long bond is facing resistance near 137'14 and again at 144'05!  I would wait for better trading opportunities in these markets.

If you are a five-year note trader, today's rally may have presented a short term opportunity on the short side in hopes for a decline to about 120'03.  You should be able to buy a week's worth of insurance above 121 for about $100. 

If you like our support, resistance and target numbers you should consider trading with us (if you aren't already), we have similar intraday analysis that is communicated to our clients upon request by email, instant message and phone.

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

Flat

Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

Flat

Eurodollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

·         January 8 - If prices rally to 9915, this may be a good opportunity to liquidate the long call at a profit and hold onto the short futures contract. 

·         January 9 - Those that took the original recommendation were encouraged to take profits on the long March Eurodollar 9875 call as noted in yesterday's report.  It was also possible to replace the protection with the cheaper February Eurodollar 9912.5 call.

January 9 - If you didn't participate in the original Eurodollar recommendation, you may want to consider a similar trade.  This morning we were recommending that our clients sell the March futures contract near 99.16.  Those that were uncomfortable with a naked short were advised to purchase the February Eurodollar 9912.5 Call for about 13 points or ($325).  This limits the risk to the amount paid for the option minus the difference in the futures fill and option strike price.  Thus, assuming the fills noted above the risk would be about $237.50 plus transaction costs. 

*Due to the volatile nature of the futures markets some information and charts in this report may not be timely.

There is substantial risk of loss in trading futures and options.