February 6th, 2009

See DeCarley Trading's "Trade Like a Girl" article in the March issue of Stocks Futures and Options Magazine!

Weak employment numbers fail to phase Treasury bears.

The financial futures markets took news of one of the gloomiest jobs markets in history in stride.  Or at least they didn't react in a way that you may have expected.  Rather than gaining a safe haven bid, traders sold Treasuries into  the news with the premise that a weaker economy would lead to even more fixed income issues by the Fed.  Accordingly, supply concerns continue to be the dominant factor in the market.  However, we have a sneaking suspicion that the theme will soon change...at least temporarily. 

U.S. employers cut nearly 600,000 jobs in January.  This was well above the expected 500,000 but when you are referring to such sizable numbers and a volatile economy, the miss was considered moderate.  The unemployment rate was calculated to be 7.6%, the worst reading in at least 16 years.  The dreary data seemed to be perceived as added incentive for Washington to pass the stimulus package and another bank bailout program in a timely manner. 

While fixed income supply is  getting all of the headlines, there is no doubt some fear of inflation.  Large capital injections into the system are arguably necessary, but they aren't without consequences.  Many are calling for the inflationary impact to come into play as early as late 2009.  Nonetheless, William Bellamy of Thompson, Siegel & Walmsley stated, "Supply is ruling the bond market."  He added, "with $67 billion in Supply coming, it's hard for yields to move lower."  In the long run, we agree with Mr. Bellamy but in the short run we could see the opposite.

As the market grinds lower and volatility changes, our models are adjusting price targets.  It seems as though the 30-year bond may be headed for a 124 or slightly lower before buying interest ensues.  Our previous expectation was for just under 125.  We are still looking for the 10-year note to dip under 121 and the five year note should see the mid 117's by early next week.  At which time we begin to like the upside, in hopes of a short covering rally. 

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. 

Eurodollar Futures Trading Recommendations

**There is unlimited risk in trading futures.

Flat

*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.