May 4th, 2009

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Fed buys notes, but bounce fizzles

Bond and notes managed a moderate mid-day bounce in light of the Fed purchasing $8.5 billion in 7 to 10 year notes.  This completes $85 billion of the "up to" $300 billion slated for Treasury repurchases.  However, the Feds efforts are being undercut by declining demand for U.S. backed fixed income products. 

In the month of April, Junk and investment grade corporate bonds traded at record spread levels against Treasuries.  Despite bankruptcies and threats to debt holders, the seemingly stabilizing economy is luring investors away from low yield low risk ventures into riskier alternatives. 

Also hindering the Feds attempt at keeping yields low is market speculation of the longer-term impacts of the very buying that is intended to hold bond and note prices up.  In other words, the Fed's policy of buying its own securities is essentially printing money, which in turn leads to inflation and much higher interest rates (lower bond and note prices).  You may remember the fall rally in which Treasury prices soared in anticipation of Fed buying.  In essence, the market is one step ahead of the Fed.  Markets have always been forward looking and therefore have maintained a "buy the rumor sell the fact" mentality...Fade the Fed?

We think that bonds and notes could have a little farther to slide on the downside but will be looking to become bullish near or below 120 in the T-bond and near the mid-119's in the T-note. 

* 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.

Flat

Eurodollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

April 30 - Our clients were recommended to sell the June Eurodollar near 98.045

*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.