March 17th, 2009

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Interest rates climb ahead of FOMC

Despite a nearly two-handle range in the long bond, Treasury futures were essentially directionless ahead of the Fed.  Unlike last week, traders will be provided with healthy dose of economic data this time around. 

The most recent month's PPI data was reported to be a bit tamer than originally expected.  However, most traders are looking forward to tomorrow's CPI for additional confirmation.  Housing starts surprisingly exceeded what the street was looking for; consensus was reported at 450,000 but the actual figure was closer to 600,000.

Volume has been unusually light in the first two trading days of the week and this may be the case until post-FOMC later tomorrow afternoon.  Bond traders won't necessarily be looking forward to the interest rate decision itself.  After all, there isn't any room for rates to move on the downside and it doesn't seem like popular policy will support a rate hike.  What Treasury futures and options traders will be focused on is any inclination as to whether the Fed will participate in the practice of buying long dated bonds and notes as a method of controlling market interest rates.  Despite what seem like overall bearish fundamentals, it seems as though there is potential for a sudden rally should the market be reminded of the possibility of "Quantitative Easing" and the light volume could magnify the move. 

According to a Wall Street Journal article, "buying Treasuries in significant amounts at a time of massive budget deficits would help keep rates low and the government's borrowing costs cheap, it also could compromise the Fed's Independence."  The article also implies that the practice of the government buying its own Treasuries will distort market rates and cause trouble once the economy normalizes.  Nonetheless, it seems as though the Fed is keeping its options open and if foreign buying eases it could become a reality.    

From a technical standpoint, there isn't much to say.  The market has been relentlessly range bound with decreasing volatility.  However, we all know that directionless Treasuries won't last for long. 

* 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.