December 1st, 2008

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U.S. Treasury yields plummet on bond friendly headlines.

"There is nothing so disastrous than a rational investment policy in an irrational world" - John Maynard Keynes

Treasuries have been relentlessly moving higher regardless of the typical inter-market relationships or remarkably low yields.  It is clear that interest rate products have been committed to higher prices despite last week's equity rally, choppy trade in the greenback and lower gold prices.  This market has developed an agenda of its own, but it can't last forever. 

Bond and note futures have experienced similar heights a small handful of times in the past, but have never managed to trade at such levels for long periods of time.  Picking an exact top is nearly impossible but I think that it is fair to say that we are approaching some sort of blow of ending to one of the most memorable bond rallies in history. 

The day's news was forgettable at best.  The ISM manufacturing index was reported to be below forecasts with a reading of 36.2.  Similarly, construction spending was expected to see a draw of .9% but the headline number came out at -1.2%. 

The National Bureau of Economic Research claims that the current recession officially began in December of 2007.  Some are considering this to be good news in that they often announce a recession only months before it comes to end. 

Futures trade has effectively rolled into the March contract.  The last trading date for December futures isn't until the 19th, but for the sake of liquidity you should be moving into March by week's end.  Perhaps "the roll" is adding to the upward momentum, but from the sense of confusion that I am getting from many traders there doesn't seem to be a sound explanation for a 2.80% yield in the 10 year note.  However, it is hard to argue with a runaway freight train. 

If you are like me, your appetite for risk has likely diminished.  The best way to  play an irrational rally is to buy cheap out of the money puts and wait for the reversal.  It will come...eventually. 

If you are still holding the short calls as recommended below, depending on your account capital etc. you may want to consider rolling them into the March 136 calls for even money.  Another idea is to buy the calls  back and buy puts instead.  However, if you have the fortitude and the money to try to ride this one out I think that rolling into March or holding the existing position will ultimately result in a much more comfortable scenario. 

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

November 26 - Buy the January 10 year note 115 puts for about 15 ticks.

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.

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