February 4th, 2009

See DeCarley Trading quoted in the "Hot Commodities" section of this month's Futures magazine!

Heavy Treasury trade may get boost

With plenty of government fixed income issues in the cards, Treasury buying remains minimal.  Additionally, the Fed is trying to get creative in their debt issues by re-introducing the 7-year note in February.  They also announced that they would be selling more 30-year bonds in an attempt to raise $2.5 trillion to fund its borrowing needs in the 2009 fiscal year.  In the meantime, trader's haven't forgotten about the stimulus package which now carries a price tag of $900 billion and will be a big incentive for the government to borrow even more. 

On the economic front, the ISM services index was reported to be better than expected but still well within contraction territory at 42.9.  The ADP projection of the governments non-farm payroll data is all but reliable; however, it seemed to add to the negative tone in Treasury trade.  The ADP is calling for a loss of 522,000 jobs in January.  Most analysts are expecting near 500,000 but the markets have likely accounted for 600,000. 

Long maturity Treasuries have been consistently trading lower since mid-December but the tides may be turning soon.  While we remain fundamentally bearish, market action isn't always driven by fundamental factors.  We can't help but feel as though the 30-year bond's plunge from the low 140s to under 125 will be followed by some type of short covering rally.  With that said, today's slow grind lower may indicate that yesterday's projection of 125'15 may actually give way to 125'08 and the possibility of 124'15 before a reversal. 

We are beginning to like the long side in the 10-year note, but see the potential for prices to fall to 120'15 before things turn around.  Five-year note traders may look to get long near 117'11 in hopes of catching a short covering rally. 

Our clients were advised to exit the Eurodollar trade near 98.79 to take a small profit.  We prefer to wait for better market action. 

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

February 3 - Sell the March 116 puts for 25 or better, it will take weakness to get filled. 

Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

February 4 - Buy the March 5-year note near 117'11 or better. 

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

·         February 2 - If you are still holding this trade, place an order to sell at 119'01 to take a profit of about $937.50 before commissions and fees (some of you may have taken a quick profit on Friday).

·         You should be out of this trade as noted in the newsletter dated February 3. 

Eurodollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

January 30 - I like buying the March Eurodollar near 98.75 looking for a quick move higher.  We don't expect the March contract to break out of its trading range...and it is a slow move anyway.

·         Place an order to sell this position at 98.93 to take a profit of $450 before commissions and fees.  Those that entered at better levels than that noted above may want to take profits a little early as this trade is against the grain of fundamentals.

·         Clients were advised to exit this trade near 98.79 to take a small profit.  We prefer to wait for a better set up.

*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.