January 29th, 2009

More supply...Treasuries sag

This morning's economic data left a lot to be desired.  New home sales sank sharply beyond expectations, durable goods orders were also reported as weak and jobless claims surpassed forecasts.  Yet Treasuries continue to grind lower on supply concerns. 

The Federal Reserve and the Obama administration have made it very clear that they will spare no expense when it comes to saving the U.S. banking system from collapse.  Accordingly, they have been issuing massive amounts of Treasuries as a means of financing current bailouts.  This has been known and accounted for; however, corporate bond issuance may be outpacing the market's expectations. 

In the most recent week, U.S. commercial paper market shrank by a record $98.8 billion as domestic corporations refraining from issuing new paper.  This was the third consecutive week that outstanding commercial paper fell.  Many analysts are attributing the declines to year end activity, but there is no doubt that the new issues will detract from Treasury demand. 

Aside from turmoil in the stock market, Treasury traders focused most of their attention on the $30 billion 5-year note auction.  The note sale turned out to be a disappointment, leaving the long end vulnerable while the short end seemed to be buoyed by sluggish stocks. 

I am beginning to turn moderately bullish as the market continues to slide in anticipation of an oversold corrective rally.  However, there seems to be a little room to move on the downside, perhaps to126'06.  However, near-term bears should be cautious as the odds of a short covering rally is increasing.  The 10-year note looks to be ripe for a short covering rally under 123, but I would feel better about being a bull just under 122 as there is potential for a move to 120'17.

The 10-year note looks to be ripe for a short covering rally under 123, but I would feel better about being a bull just under 122 as there is potential for a move to 120'17.

As mentioned in yesterday's report, we like the idea of getting long the 5-year note but regret the typo.  It should have read that we are looking to get long near 118'03 (not 108'13).  I deeply apologize for any misunderstanding this may have caused.  Those trading notes with me were made aware, but I know that there are many following this newsletter trading elsewhere. 

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.

January 27 - Buy 1 March 5 year note at or near 118'03

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. 

·         January 15 - Clients were recommended to buy the futures contract back at 98.93, assuming the fills above this locks in a profit of 25 points on the futures contract or $575.  However, this doesn't consider the loss on the long call.  Nonetheless, it guarantees a profit of at least $300 before commissions and fees even if the call expires worthless.  Hopefully a market recovery will allow for exit of the call at a better price. 

*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.