January 28th, 2009

Longer maturities pressured by Fed and stock rally

Pre-FOMC, Treasury trade was dominated by those looking to get out of the market, as opposed to those placing speculative bets in the market.  A choppy session saw heavy late day selling on light volume as the Fed announcement neared and the stock indices broke major technical levels.

Talk of a continuation of the banking rescue has kept supply issues in the back of the minds of traders and likely helped to put a cap on this morning's moderate buying.  Anticipation of the Fed offering additional confirmation of their option to purchase long dated T-bonds as a means of controlling market interest rates had little impact on bond and note trade before the FOMC announcement and despite mention of it, had little impact afterward.  As we have mentioned, the 2008 rally seems to have already accounted for this and traders have shifted their focus to the supply side of the equation. 

As expected, the Federal Open Market Committee left the target Fed funds rate at 0 to .25%.  They justified the lack of action by their anticipation of continued economic weakness.  On a brighter note, the Fed expects that a gradual economic recovery could begin later this year but they noted that significant downside risks remain.  Many analysts predict that he Fed will leave rates at the current target range for the remainder of 2009 as a means of supporting economic activity. 

Yesterday's moderate rally combined with this morning's meager attempt at gains failed to reach our upside targets and seem to be making their way to our downside projections which have been slightly adjusted.  We are looking for the March T-Bond to trade down to 127'11 in the coming session, and possibly 126'10 in a slightly longer time frame.  However, we feel as though seasonal and technical factors may allow for a corrective rally at this point.  The 10-year note, on the other hand, seems to be destined for 123 in the short term and 120'17 in the coming week or two. 

We are looking to buy the March 5-year note near 108'13 in the coming week or so. 

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.

January 27 - Buy 1 March 5 year note at or near 108'13

Eurodollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

December 17 - Clients were recommended to Sell March futures near 98.84 and buy the March 9875 call for 21.  The total risk is $300 plus commissions and fees (2 of them), profit potential is theoretically unlimited, and this trade gives you three months in the market!

·         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. 

·         January 15 - Clients were recommended to buy the futures contract back at 98.93, assuming the fills above this locks in a profit of 25 points on the futures contract or $575.  However, this doesn't consider the loss on the long call.  Nonetheless, it guarantees a profit of at least $300 before commissions and fees even if the call expires worthless.  Hopefully a market recovery will allow for exit of the call at a better price. 

*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.

Past performance is not indicative of future results.  The information and data in this report were obtained from sources considered reliable.  Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.  Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.