March 18th, 2009

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We knew it wouldn't last

As we have been warning in the previous weeks, the volatility lull in Treasuries couldn't last; instead, it was the calm before the storm.  We also pointed out that despite bearish fundamentals, the break out of the range could be on the upside due to the impact of quantitative easing and a very large number of short traders. 

The fact that the market was too short, left the Treasury complex vulnerable to a massive short squeeze and today was the day.  We refrained from recommending short option plays in this market due to the possibility of today's massive move but feel as though that may be a viable play going forward.  However, we will wait for the dust to settle.  Unfortunately, we also refrained from being long volatility as we would have liked because of already high option pricing. 

The Fed confirmed that they will be buying longer dated maturities in the amount of $300 billion over the next six months.  According to my sources, they will buy the 2-10 year maturities. 

The latest CPI reading was a non-event.  While the number suggested a slight uptick in pricing pressure at .4%, it was widely expected.  Similarly, the current account deficit was reported at levels near consensus estimates.  However, coming into the day traders were more concerned with the Federal Reserve's interest rate decision but better yet any hints as to what we can expect in the future. 

Once again, trading volume was on the light side but did pick up a bit on what seemed to be either position squaring in the last few hours before the announcement, or simply positioning in anticipation of quantitative easing talk.  As it turned out, those that were getting long into the announcement literally hit the lottery in their trading accounts. 

The U.S. dollar hasn't been dragging on the 30-year bond as it should be.  The index has fallen from the low 90's and appears to be approaching the mid-80's in recent weeks.  Nonetheless, we are expecting a push in the Dollar toward 81.80 and in the absence of political distractions Treasury traders may take note. 

The June 30-year bond settled over two handles off of its daily high, and ended the day in the green by over three handles.  it seems as though a close above 130 in tomorrow's session suggests that we could be in store for much higher prices and possibly even 142 again.  Similarly, I suspect that the 10-year note will trade above 130 again.  Our intermediate term target in the 5-year note is 122'05.

* 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.