February 17th, 2009

Supply theme quickly moves to flight to quality.

Investors scurried for quality on the Tuesday following the President's Day holiday as evidenced by a rally in Gold, the U.S. Dollar and Treasuries.  Suddenly the supply issues that were the focus of previous weeks have been put on the back burner as fears over the viability of the banking system run rampant.  Also fueling the Treasury bulls is the non-existent confidence in equities and the potential for a retest of the November lows. 

The day's gains were despite growing supplies of fixed income securities.  Global debt issuance has been at unprecedented levels and is expected to grow.  Additionally, cash strapped corporations are also selling a considerable number of bonds. 

The latest TIC (Treasury International Capital) data was released today; however, because the data lags by 2 months it doesn't typically attract a lot of attention from active traders.  Even so, foreign buying ticked higher suggesting that despite the turmoil the demand for U.S. securities remains relevant. 

Trading volume during the session was extremely light.  Perhaps many stretched the President's Day into a four-day weekend.  As a result of the light volume the day's trade seems to have been exaggerated. 

After seeing today's action, it seems as though Friday's weakness may have primarily been the consequence of position squaring ahead of the holiday.  we were right to assume that last week's rally would fizzle, but we didn't account for the sharp buying in today's session.  Accordingly, we are going to take a step back in our analysis. 

Treasuries are currently at a crossroads that could determine their overall direction in the coming weeks.  We see major resistance in the 30-year bond near 133 and support at 123.  At either end of the spectrum we may be interested in selling premium against the move but recommend being on the sidelines for now. 

* Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data.  However, market analysis and commentary does.

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.

Feb. 17 - Sell the Five-year note at 119'25

Eurodollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

Feb. 17 - Buy the June Eurodollar at 98.62

*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.