December 3rd, 2008

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Insanely low yields haven't deterred the buyers.

If you shoot a bullet into the air, it will eventually come down.  However, the timing and the magnitude of the rise and fall are questionable.  The same can be said of the Treasury market. 

After an early morning dip, Treasury buyers were lured back to the markets as equities struggled to hold gains.  The market has finally seen some small pockets of profit taking from those that had the foresight to be long but the resulting pullbacks are moderate at best.  Even with all of the bond friendly data recently released and likely on tap, the market is vulnerable to the inevitable correction.  After all, the 30-year bond has experienced a twenty-handle rally without meeting much selling pressure at all. 

The story of the day was the Fed's Beige Book which reiterated the dark cloud hovering over the economy.  The dismal report was expected, and suggests that weaker growth in nearly all regions of the nation.  It also noted declines in inflation and a slowing commercial real estate market.  No surprises, but acted as incentive for long bond traders to remain so and short traders to cover positions. 

Much earlier in the day we heard ADP's prediction of the employment data due to be released at the end of this week.  Their "stab" at an estimate was a draw of 200,000 non-farm jobs.  Not a pretty picture, but also not necessarily reliable.  I prefer to wait for the actual figures before jumping to conclusions.  Nonetheless, the Treasury market has essentially priced in a dismal reading making it somewhat difficult for the data to trigger more buying. 

In fact, we may see significant selling pressure ahead of Friday's employment data as long traders should be reluctant to push their luck.  Additionally, while short traders have been in a disastrous position as of late, the complex seems like an obvious sell for those that have the nerve and the money to ride it out.  Friday's data may be just what the market needs to reverse; those "burned" on the way up won't want to miss out on the way down...if of course it happens. 

The next major area of resistance in the March 30 year is 133'10 and 124'0 in the 10-year note.  Once again, the prudent way to play this market is through the purchase of out of the money put options.  You may have to follow the market higher, but eventually they should come around. 

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

December 2 - We recommended buying the January 119 puts for 20 or better.

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). 

·         You may have taken our advice to roll into the March 136 calls for even money.  This lowers the delta and the margin, hopefully improving the odds of riding this out. 

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.