April 28th, 2009

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No signs of life

Seasonal tendencies and supply concerns have weighed heavily on Treasury trade in recent weeks; today's failed attempt at a rally seems to be glaring evidence that this continues to be the case.  Better than expected news from the Conference Board in regards to consumer confidence and $35 billion in 5-year notes being auctions at higher than expected yields put immediate pressure on bonds and notes.  What started as a moderately positive session, quickly turned into swiftly negative Treasuries.  The 30-year bond suffered losses in excess of two handles from high to low.

The Treasuries efforts to manipulate interest rates via quantitative easing don't appear to have been hugely successful in the Treasury markets.  However, it is important to realize that while the market hasn't reacted to the confirmation of the Fed's plan to purchase Treasuries, the rally that paved the way for prices to hover at such historically high (low yield) prices was founded on the possibility of government intervention in the marketplace.  Conversely, mortgage rates have fallen to historical lows suggesting that the Fed's efforts have had some impact in peripheral markets. 

Yesterday's session brought a dramatically stronger dollar, but currency markets spent today eliminating the premium built into the greenback.  The lack of follow through buying likely helped to set the bearish tone in the long bond.  Trade across the financial markets has become overly choppy and even more predictable than what it normally may be.  Accordingly, we are inclined to take a few steps back and encourage traders to either be on the sidelines or involved with mitigated exposure. 

The overnight rally nearly met our target for the 10-year note but fell short of our expectations for the 30-year bond.  As a result, we are becoming uncomfortable with our previous recommendation to sell June Bond 118 puts and will be cautious going forward.  While there is still plenty of room between the market and our strike price with only 24 days until expiration, this trade has strayed from our original intention of being a short-term venture looking to capitalize on a market bounce.  Bounces have come and gone, but without the momentum that we had anticipated. 

We see significant support in the 30-year near 123'04 and resistance at 125 and again near 126'19.  Note traders should look for support near 121'03 with resistance at 122'22 (today's high).  Intermediate resistance may be found near 122'09.

* 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.

April 17 - We recommended to sell the June Bond 118 puts near 20.

April 22 - Those of our clients that didn't get in on the original recommendation were able to get in today at better prices.  Fills were coming in anywhere between 24 and 21.

·         April 28 - Clients were advised to liquidate this position at a small loss prior to the FOMC announcement due to excessive event risk. 

Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

Flat

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.