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 November 4th, 2010  

Good employment report, caps Treasury futures rally

It has  been an exciting week in Treasuries, yet the December 30-year bond futures settled near unchanged on the week. In fact, the long bond hasn't moved much in three weeks despite somewhat dramatic re-pricing in the 5 and 10-year note futures.   A reading of 151,000 in the non-farm payrolls came in at double the expectations, yet the unemployment rate didn't budge from 9.6%.  However, pending home sales represented the bullish case; they were reported to be a draw of 1.8%.  

 Judging by today's action, the primary driving force was likely position squaring ahead of the weekend and in the aftermath of three of the largest fundamental events of the year (Fed, election, employment report).  Additionally, the market is facing the last of the scheduled POMO on Monday (the new schedule will be released on November 10th) and a 10 year and 30 year Treasury auction. 

The 30-year faces a challenge in that the Fed will no longer be putting a substantial amount of money into this space, without support from the Fed's POMO program it will be necessary for the long bond to muster up some buying interest from "actual" investors. 

 The disconnect between the long and short end of the curve has us a little gun shy in making bold calls in the long bond and waiting for early next week to re-assess the situation.  In the last newsletter we stated: "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. "  The late Thursday, early Friday highs were enough to meet this objective and leaves us slightly (and cautiously) leaning lower.  That said, it feels like the mid-128's could be seen.  Patient bears should wait for this price.   

* 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.  

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.   November 2- Clients were recommended to offset the 125 puts near 12 to lock in a profit ahead of the Fed announcement.  

*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.