February 25th, 2009

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Treasury yields tick higher

The only economic news to speak of was existing home sales which were reported to be weaker than originally expected.  However, today was relatively eventful given the Bernanke testimony and last night's Presidential address. 

Ironically, Treasuries sold off on word of the deeper than anticipated housing slump.  Traders are clearly seeing negative news as a hint toward more economic stimulus programs and thus U.S. backed debt issues and seem to be seeing supply issues as a priority.  However, as mentioned in yesterday's newsletter this theme may temporarily fade. 

Volume was dramatically light as traders see the lack of direction and event risk a potential recipe for disaster.  However, the economic data will be picking up in the last couple of days and should lure, at least some, traders back to the markets. 

Some of the day's losses were temporarily pared following the 5-year note auction.  Despite low yields, buying interest continues to show up as investors flock to safety.  Eventually, it seems as though trade will consider this into the equation and find at least temporary strength.  However, over half of the issued Treasury debt is being held by foreign institutions. 

One has to wonder how long they will be able to continue buying at this pace.  Just recently, China's central bank said "External demand is shrinking, some sectors have overcapacity, and urban unemployment is rising.  Downward pressure on economic growth is increasing.  There exists a bid risk of deflation." 

As you can infer from the recent commentary, we are on the fence in terms of an immediate directly but are slightly leaning higher due to fundamental pressures noted in yesterday's newsletter.  In the long bond we see support near 126 and again just above 125.  At this point, we expect this general area to hold.  Resistance remains at 130.  The 10-year note looks to be headed toward 121'13 at which time we like being cautiously bullish. 

* 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.

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Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

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Eurodollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

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*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.