February 9th, 2009

See DeCarley Trading's "Trade Like a Girl" article in the March issue of Stocks Futures and Options Magazine!

Treasury traders wait for government aid package.

The interest rate markets traded moderately lower pushing yields to fresh two month highs ahead of the stimulus package announcement.  The thought of the Fed adding even more supply to the fixed income markets has kept buyers at bay.  Despite economic turmoil and what seems like otherwise friendly Treasury news, there is a record amount of Treasury issues and an equal amount of uncertainty. 

The U.S. government plans to sell $32 billion in a 3-year note auction tomorrow, $21 billion in 10-year notes on Wednesday and $14 billion of the 30-year Bonds on Thursday. 

Also helping the bear camp could be optimism over the proposed stimulus package and Tim Geithner's expected announcement of the new TARP plan.  Adding to an already considerable amount of event risk, Fed Chair Ben Bernanke is slated to speak on Tuesday before the House Financial Services Committee on the actions being taken to supply the nation's financial markets with liquidity. 

Clearly, there is concern over the fact that the massive injections of liquidity into the system that are deemed necessary to thwart a potential collapse of the financial system will eventually become an inflationary hazard.  Accordingly, traders seem to be comfortable on the short side of Treasuries. 

We have been calling for a temporary correction in Treasuries as short covering ensues.  While we still believe that this will become a reality in the not-so-distant future, we also feel as though current price action supports an immediate continuation of the price slide.  In fact, it appears as though the 30-year bond will could see prices beneath 124 before buyers will be tempted to step in.  Likewise, the 10-year note will likely see the mid-120's shortly and our expectations for the 5-year note have been adjusted lower to the low 117's.  Clients were advised to adjust their order to buy the March contract at 117'11 to 117'06. 

In our opinion, it is too risky to sell a market that has just undergone such a massive re-pricing.  The quietly lower trend could quickly become a massive short squeeze.  On the other hand, buyers must be careful in that an early entry could be disastrous.  Thus, we are opting to play it safe and prefer to miss the trade altogether than to  be caught on the wrong side of a violent move. 

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

February 3 - Sell the March 116 puts for 25 or better, it will take weakness to get filled. 

Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

February 4 - Buy the March 5-year note near 117'06 or better. 

Eurodollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

Flat

*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.