Bond and note futures soar

 The ten year note has quickly made its way back to a 2.5% yield following yesterdays FOMC announcement.  The note yield hasn't spent much time below 2.5% (ever); however, the long bond looks to have some room to move and this could mean December note futures trading as high as 126'27 which could mean the cash market yield trades into the low 2% range.   

The Fed might not have mentioned QE2, but the market seems to be counting on it.  After all, they left the door wide open to just about anything by declaring they are "...prepared to provide additional accommodation if needed to support the economic recovery."   

Goldman Sachs economists are predicting the central bank will announce at the next meeting its intention to purchase at least $1 trillion of Treasuries...and the market knows this and seems to be in the process of pricing it in.  However, before the bulls get too excited...it is important to remember that more often than not, Treasuries seem to rally more on talk of Fed asset purchases than on the action itself.  In fact, it isn't uncommon for longer-dated government securities to struggle during the scheduled security buying.   

From a technical point of view, the 10-year note has reached our initial target of 125'25 and clearly hit a wall.  However, the 30-year bond is yet to reach our first resistance of 134ish and we "feel" like momentum could take the long bond to a bit above 135, this could drag the note up with it.  Therefore, we recommend any bearish positions on the note be taken with caution and preferably a hedge as there could be more gains ahead before the buying runs out of steam.   

Keep in mind, our technical objectives are counting on near-term weakness in equities but even if stocks maintain stability it is possible for the Treasury complex to move a bit higher...but at a measured pace.

 

 

 

* 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.  Charts provided by Track 'n Trade, Gecko software.

 **Seasonality is already factored into current prices, any references to such does not indicate future market action.  

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.  

8-10-10 Clients were advised to sell the October 135 calls for 24/27  

8-25-10 Clients were advised to roll their short 135 calls into short October 130/139 strangles with a short November 142 call.  If volatility declines, the current lopsided strangle should benefit.   

8-26-10 Clients were advised to purchase October 5-year note 120 calls and sell futures this afternoon for a total risk of under $600 (before considering transaction costs).  This gives traders 30 days in the market with unlimited profit potential, capped risk and the ability to quickly adjust or take profits (futures face much tighter spreads than options).  

9-3-10 In regards to the bond strangle noted above, clients were recommended to buy back the October 139 calls yesterday for about 14 and to buy back the November 142 calls for about the same price.  After the futures retraced from the lows, we decided it would be prudent to roll the October 130 puts into November 125/138 strangles at a small credit.   9-9-10 Clients were encouraged to buy back their 5-year note futures at a profit near 119'06 to lock in a nice profit.  They are now holding long 120 calls hoping for a rebound to recoup some of the premium.   

Treasury Bond and Note 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.  Past performance is not indicative of future results.  The information and data in this report were obtained from sources considered reliable.  Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.  Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.