November 25th, 2008 

Visit us at www.CommodityOptionstheBook.com!!

Tuesday's Treasury rally may have been the last hurrah!

As suggested in yesterday's newsletter, short Treasury traders scrambled to buy back short positions.  The short covering sparked another impressive rally but failing to reach Thursday's cataclysmic highs.  In addition to panicked shorts, the market bid was fueled by a reminder of negative GDP, flailing home prices, and the announcement of a massive injection of funds to asset backed markets by the Fed. 

The preliminary GDP was revised to a negative .5% with a much bigger drop in personal consumption than expected.  However, Treasuries seemed to find a solid bid on the deflator which continues to show deflation.  The interest rate markets are now seemingly expecting a rate cut of 75 basis points by the December meeting. 

Contrary to what we have been seeing in recent months, U.S. Treasuries and the greenback took opposite paths. The Dollar has traded swiftly lower in the previous two sessions, but bond and note prices failed to follow.  The disconnect can be argued from many angles, but it is my belief that the bond rally was somewhat artificial due to short covering and may be to blame for the lack of correlation. 

The relationship between stocks and bonds also shifted during today's trade.  Treasury futures were highly reluctant to react to early morning and late afternoon strength in the equity markets but had no opposition to reacting to the mid-day selling pressure in stocks. 

Consumer confidence data was reported to be better than expected but didn't play a role in the outcome of today's trade.  The index was reported at 44.9 despite most analyst predictions of a number below 40. 

Picking an exact top is nearly impossible, I think that Thursday's trade offered proof for those that think that they may be talented enough to do so.  However, it seems as though Treasuries are due for a large correction.  While a retest of Thursday's highs can be ruled out, I think that we will see bonds and notes trade lower from here.  If I am right, we could see the December 30 year fall just below 119 in the coming weeks.  Likewise, the 10 year note should see 117 soon. 

Treasury Bond Option Trading Recommendations

**There is unlimited risk in naked option selling.

November 18 - I like selling the January 130 calls for 30 ticks or better, but slightly more aggressive traders may look at the129 calls for 30 (this was getting filled today). 

·         These are both well underwater, but we haven't given up on the long-term prospects.  We recommend holding on for now. 

November 20 - We were recommending to buy the December T- note 112 puts for about 19 ticks. 

·         November 24 - You can get in at a better price, you may want to buy the 113's. 

Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

Flat

Eurodollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

Flat

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