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August 19th, 2011  

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Bearish activity in Treasury futures options!

There weren't any economic releases to guide trade, so it was all about Europe.  Unfortunately, the Euro zone seems to have moved from a state of fear to a state of panic and once the global cycle of volatility gets started, it is difficult to turn the momentum around.  European shares were down 2 to 4% for most of their session, triggering another wave of safe-haven buying.  The long end of the Treasury curve, and gold, were the primary beneficiaries (despite a temporary bout of early morning profit taking).   

Although it has become quite obvious simply by looking at charts, I thought I'd put some perspective on the safety trade.  The markets have nominated the Swiss Franc, the Yen, gold and U.S. Treasuries as the place to park cash throughout the most recent wave of volatility.  Stats suggest that the correlation coefficients for gold and the Franc vs. Treasuries is near 94!  This doesn't offer any help with timing, but it is important to realize that extreme signs of correlation often mean markets are heading toward extremes. 

Naturally, this can go on for quite some time (you've all heard the mantra "markets can stay irrational longer than most can stay solvent").  When and where traders begin unloading positions in these overcrowded trades, it could be swift and unforgiving for those in the market's way.   

 It feels like we could get the last hoorah of the pessimistic trade in the coming days (this could mean sharp reversals in equities, gold and Treasuries).  If this is the case, the long bond could see prices has high as 143ish, and the note just over 132.