October 9th, 2008

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Slight easing in the credit markets and sell stop running keeps Treasuries down.

The Treasury markets continue to price in another quarter point rate cut by the Fed and likely the same action by the European Central Bank.  Injected liquidity along with aggressive rate cuts is being seen by a step in the right direction; accordingly the flight to quality bid is being sucked out of the complex.  Ironically, the equity markets haven't come to the same conclusion.   While bond traders are welcoming the slow but sure improvements in the credit markets, equity traders are growing increasingly uncomfortable with the nearly unbearable pace of progress.  Based on my analysis and assumptions, I believe that the bond market has it right this time. 

There were a small handful of economic releases but the news was irrelevant given the trading environment. 

It is nearly impossible to follow the fundamental drivers of bond futures due to the event risk involved.  At any given time, there could be an announcement by the Fed or any other central bank that completely turns the picture.  Therefore, I think it best to rely on technical action in the markets for guidance.  As leaks and anticipation will often cause the market to move before the news ever reaches the public via media outlets. 

With that said, barring any new unexpected fundamental changes, the 30 year bond futures should make its way lower to sub-116 levels.  However, there may be a minor technical bounce in store before the next move lower.  My first target is 115'14 while resistance will be found at 118'08 and 119'03.  In a longer time horizon, I see the potential for the long bond to reach levels as low as 112.  The 10 year note begins to become attractive on the long side on a temporary basis from 113'07.  In the meantime, resistance comes in near 115'17 and again at 116'01.

I like selling the October 30 year bond options; you may be able to get 25 for the 111 puts if the market continues to trade lower to support. 

Treasury Option Trading Recommendations

**There is unlimited risk in naked option selling.

September 10 - Sell the October 111 puts for 25 or better.  It will take additional weakness to get filled. 

Treasury Futures Trading Recommendations

**There is unlimited risk in trading futures.

Flat

Carley Garner

Senior Analyst / Commodity Broker

DeCarley Trading

cgarner@DeCarleyTrading.com

1-866-790-TRADE

Local : 702-947-0701

www.DeCarleyTrading.com

There is substantial risk of loss in trading futures and options.

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