January 7th, 2009

Bonds looking lower, but bounce looming.

The short end of the curve (very short) rallied but failed to bring the long end along for the ride.  What started as a bond friendly day, ended up being a day full of light volume plagued with an oversupply of fixed income securities.  The new trend seems to be lower, but with prices dropping so far so fast would could be due for an oversold bounce in the coming days.  Perhaps the move will occur on the heels of Friday's employment data...

Early morning buying was triggered by news of payroll firm ADP's estimates of Friday's non-farm payrolls.  According to ADP, they believe that the domestic economy has lost nearly 700,000 jobs in the most recent month.  Let's hope that this ADP prediction is consistent with their previous calls in that it is wrong.  Most analysts are predicting a draw of just under 500,000, so ADP's announcement was pretty bold and perhaps a bit reckless (unless they happen to be right this time). 

Tomorrow will be a slow news day, giving traders plenty of time to position ahead of Friday.  Accordingly, we could see relatively choppy trade.  While bonds and notes are approaching my targets, they aren't quite there.  We are in the same mindset that we were in yesterday.  It is too early to be a (short-term) bull,  and too late to be a bear.  I prefer waiting for better set ups to begin making trading recommendations. 

The treasury market has been disconnected from the infamous negative correlation with equities.  This has been the case off and on throughout the later part of 2008 and has now extended into 2009 as evidenced by the roll over in equities today with subsequent pressure in fixed income.  The lack of predictability in the relationships between financial markets adds to the already treacherous market conditions. 

We see support in the March 30-year bond at 131, and may look to be bullish at such levels.  Likewise, I like the long side of the note from about 122 in hopes of a temporary recoil from the drop.  Let's see what happens. 

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

  Flat 

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.

December 17 - Clients were recommended to Sell March futures near 98.84 and buy the March 9875 call for 21.  The total risk is $300 plus commissions and fees (2 of them), profit potential is theoretically unlimited, and this trade gives you three months in the market!

*Due to the volatile nature of the futures markets some information and charts in this report may not be timely.

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.