March 3rd, 2009

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High flying bonds, low yields

Treasury futures failed to react to another batch of negative housing data but did seem to be in tune with testimony out of Washington.  Early morning weakness was exacerbated by a comment made by Federal Reserve Chairman Ben Bernanke claiming that the increase in government debit issuance was unwelcome but failure to act with financial and economic rescues would be even more costly.  Bond and note traders took the comments as a "warning" of further issues to come.  However, it was a subsequent statement by Bernanke insinuating that the appetite for debt will remain high that sparked buying in bond and note futures. 

Some insiders noted that many Treasury traders preferred the short side of the futures market in anticipation of a stock market rally.  When early attempts at an equity rally failed, those positioned on the short side of bonds and notes began to cover positions to force prices higher. 

Although the negative correlation between stocks and bonds has been magnified lately, it seems as though they may be poised to go up together.  Seasonal tendencies should keep a floor under T-bond and T-note futures while short covering could bring the major indices considerably higher in the coming week or so.  That said, I prefer waiting for higher prices to be a bear. 

We see significant resistance in the June long bond near 125'25 but feel as though technical levels will give way to a rally above 128.  Note trade should find support near 120'27 in the June contract with our upside projection at 122'16.  If we are wrong about the direction, the next area of support is near 119'05.  A "safer" bet may be looking to sell the June 5-year note near 127'27. 

* 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.

·         March 3 - Sell the June 5-year note at 118'09 (we may have to adjust this lower as we go).

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.