December 9th, 2008

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Notes and Bonds soar, not sour.

Safe haven buying in Treasuries continues to push yields to arguably ridiculous levels, but there is no denying that investors are eager to simply get their principle back.  During the trading day, the three-month T-Bill had a yield of below zero. 

The disconnect between the typical stock and bond relationship is becoming increasingly interesting.  It is like bond traders are taking on a "selective correlation" trade.  Treasuries are quick to rally on stock weakness, but strength in equities is seemingly ignored.  Apparently, bond buyers aren't "buying" into the current stock market rally. 

The bank of Canada cut rates by 75 basis points to 1.5%, this was more than expected and keeps the lower interest rate premise in favor for now.  The only economic number to speak of was pending home sales, which was reported to be worse than expected at -.7%.  The data doesn't start flowing until Thursday, traders are hoping that some size will come back to the markets. 

Also keeping Treasuries in favor is a stable U.S. dollar.  Although the currency has made little headway in recent weeks, the greenback has managed to hold the gains achieved in September and October of this year.  That is quite an accomplishment given the current state of the economy, interest rates and the massive pessimism that plagued the dollar in previous years.  A stable dollar and the backing of the U.S. government has made Treasuries an attractive place to park idle cash for domestic and foreign investors. 

Light volumes typically have a profound impact on trade in December, and this year is shaping up to be the same.  In recent years, we have seen sharp November and December rallies met with sharp December declines.  I think that we may be in store for a similar sell off.  However, it doesn't look like the selling will be immediate.  Based on my technical models, we could see prices as high as 138 in the long bond and a little over 126 in the 10-year note before a reversal occurs. 

If the market proves me wrong, and drops from here the first significant support in the 30-year bond will be 125'12, in the 10-year note it will be 119'03.

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.

·         Clients were recommended to liquidate these this morning near 11 ticks.

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.

Past performance is not indicative of future results.  The information and data in this report were obtained from sources considered reliable.  Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities.  Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.