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Fed's QE2 not enough for 30-year bond futures traders Most analysts were predicting the Fed to announce another round of quantitative easing in the amount of $500 to $700 billion and the central bank split the difference. Today's FOMC announcement included a pledge to buy $600 billion in Treasuries through the end of the second quarter of 2011 at a pace of about $75 billion per month. For the most part, this had already been priced into the markets and was more of an expectation than a gift. The statement also revealed that 90% of the Fed's Treasury purchases would focus on the 2.5 to 10 year maturities and very little will be put into the longer end of the curve. Accordingly, the long bond suffered at the hands of mass liquidation.
The New York Fed said it would temporarily "relax" a rule limiting the Fed ownership of any particular security to 35%. The new interpretation of the rule will enable the Fed to purchase securities beyond the threshold in "modest increments". Bill Gross's description of the program as a ponzi scheme isn't too far off...
With all of the excitement, most traders had completely forgotten about this morning's economic news...which was overall bearish across all Treasuries. ADP is calling for an increase of 43,000 private sector jobs. and the ISM services remains moderately in growth territory.
Although the Fed might not be focusing on the purchase of longer dated maturities, it is uncommon for the long end of the curve to move on its own for pro-longed periods of time. Therefore, if our assumption of a rally in the 10-year note to move to the 128 area, we doubt the long bond would be able to trade much lower than 129ish..and prices in this area could be an opportune place to be a cautious bull.
If you must trade the long bond...we recommend looking for bullish opportunities at the noted level but probably wouldn't touch this market otherwise until the dust settles. The 10-year note on the other hand, propped by Fed purchases, could grind higher to the 128 area. At this point we might consider being a bear. Divergence between the two contracts makes trading difficult, proceed with caution.
* 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 and Futures Trading Recommendations
**There is unlimited risk in naked option selling.
October 8 - Clients were advised to purchase the December 121.5 call and sell the futures. The total (limited) risk on the combo is ranges from $500 to $600 depending on fills. This trade has 50 days to expiration and opens the door for theoretically unlimited profit potential.
· On October 27th, clients were commended to buy back their 5-year note futures, fills were reported near 120'28.5 - 130'30.5ish. On October 29th we recommended to offset the long 5-year note calls near 34 (those trading multiples peeled off on the previous day at a moderately lower price)
· Profits varied based on timing of entry and exit but in most cases was similar to the amount risked on the trade.
**October 26 - We recommended our clients sell the December bond 125 puts for about 27. Fills were coming in at 26 and 27.
Carley Garner
Senior Analyst / Commodity Broker
DeCarley Trading
cgarner@DeCarleyTrading.com
1-866-790-TRADE
Local : 702-947-0701
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http://www.DeCarleyTrading.com
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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.
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.
