January 9th, 2009

Lost jobs translates into safe haven treasury bid.

Fortunately, ADP's estimates for a draw of 700,000 jobs was off the market.  However, unfortunately the picture painted by the actual figures is still substantially dismal.  While the weak employment report was a significant catalyst to the day's buying, suffering equities and end of week position squaring seem to have been the bulk of the motivation.  In yesterday's report we noted the possibility of a counter-trend Friday buying, and that is exactly what we got.

According to the Federal government, the U.S. economy lost 524,000 jobs last month leaving the unemployment rate at a whopping 7.2% (I can say whopping because I wasn't old enough to remember the early 1980's).  Today's data brings the four month tally to nearly 2 million jobs lost and the highest unemployment rate in 16 years.  However, Treasury traders have been accounting for this news for quite some time (even the prior months negative revisions).  Thus, it doesn't seem to be a reason for fundamental buying.  On the other hand, had we gotten a print of 700,000 there may have been another wave of uncontrolled of safe haven bids.

Supply concerns have kept pressure on the long end of the curve, but have yet to have an impact on the short end.  Some analysts are predicting that today's employment data will ensure that there will be more government spending (Obama's stimulus plan) and more debt issued to pay for it.  Keep in mind that the Fed has sold $166 billion in debt just this week!  This is the third largest issuance on record. 

The U.S. greenback has managed to find traction vs. the other majors.  A stronger U.S. currency could help to keep a floor under Treasury prices in that dollar stability could keep foreign investors from pulling the plug on Bonds. 

Going into aftermarket trade, Treasuries pared much of the profits.  This leads me to believe that barring a swift equity sell-off early next week, the path of least resistance for interest rate products will be lower.  I am still stubbornly looking for the March long bond to see below 131, but my target in the 10-year note has bumped up to 123'07.

If you didn't participate in the original Eurodollar recommendation, you may want to consider a similar trade.  This morning we were recommending that our clients sell the March futures contract near 99.16.  Those that were uncomfortable with a naked short were advised to purchase the February Eurodollar 9912.5 Call for about 13 points or ($325).  This limits the risk to the amount paid for the option minus the difference in the futures fill and option strike price.  Thus, assuming the fills noted above the risk would be about $237.50 plus transaction costs. 

Those that took the original recommendation were encouraged to take profits on the long March Eurodollar 9875 call as noted in yesterday's report.  It was also possible to replace the protection with the cheaper February Eurodollar 9912.5 call.

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

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Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

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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!

·         If prices rally to 9915, this may be a good opportunity to liquidate the long call at a profit and hold onto the short futures contract. 

*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.