January 13th, 2009

Mixed trade across the Treasury yield curve.

Federal Reserve Chairman Ben Bernanke spoke this morning, and the Treasury market listened.  However, as equities failed to hold above unchanged Treasury yields failed to hold gains. 

Bernanke insisted that the Fed still has some ammo that can be used against the financial crisis including relieving banks of tarnished assets.  This was a departure from recent policy that focused on capital injections rather than the purchase of battered securities. 

Treasury traders took this as an indication that the Fed's promise to continue working to relieve banks and promote lending would lead to a negative flight to quality from Treasuries back to risky assets.  However, mid-day selling pressure in the equities reminded bond and note bulls why they prefer the long side of government backed assets. 

The Fed Chair also hinted at the possibility of purchasing long-term interest rate products as a means of supplementing monetary policy which has effectively lowered short-term rates to nearly zero. 

The recent sell-off in Treasuries was driven by technical trade triggered by the looming supply in light of the prospect of additional debt issuance.  Conversely, Standard & Poor's is also raising an eyebrow.  The rating's agency insists that the United States government maintains a triple A credit rating but they note that "fiscal risk has noticeably increased".

Shaky stocks and low expectations for corporate earnings seem to be keeping a cap on yields and thus a floor under treasury pricing.  Fundamental and technical signals remain mixed, but the long end of the curve seems to be leaning to the downside.  At this point, I am expecting the 10-year note to hold resistance at 126'05 and resume the down-move to 123'23.  I am less certain regarding the March 30-year bond but still expect a move below 131'0 in the coming days.  If I am wrong, meaningful resistance in the 10-year note won't be seen until 128'20 and at 137'12 in the long bond. 

If you like our support, resistance and target numbers you should consider trading with us (if you aren't already), we have similar intraday analysis that is communicated to our clients upon request by email, instant message and phone.

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!

·         January 8 - 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. 

·         January 9 - 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.

January 9 - 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. 

*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.