February 19th, 2009

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Can China continue to buy Treasuries at this pace?

The Treasury market is struggling to find a reason for yields to fall.  Not only is the Fed issuing massive amounts of debt but the bulk of the Treasury buying has been China and many are questioning whether this is sustainable. 

As you have likely heard, the Chinese have dedicated themselves to purchasing U.S. assets as a method of keeping the value of their currency at low levels.  As you can imagine, this is a challenge given the massive number of exports out of the country.  However, with the global economic weakness it seems likely that a decrease in Chinese exports may detract from the need to deflate its currency and therefore buy U.S. backed fixed income products.  Additionally, the G7 is pressuring China to appreciate its currency in order to alleviate trade imbalances. 

Bond and note traders have expressed their expectations for the Fed to sell debt in order to finance the latest wave of bailouts, but beneath the scenes lawmakers are working on alternative ways to raise the capital.  In order for the new administration to keep their word in regards to income tax hikes, it may be necessary for the increases to be levied by alternative means. 

It was brought to my attention today that there are may be attempts to tax traders per transaction.  I haven't gotten the chance to fully research the matter enough to determine whether the talks are serious.  However, after seeing the manner in which everything plus the kitchen sink was included in the stimulus bill I don't take anything for granted.  If you would like to speak out against a transaction tax charged to futures, options and stock traders visit http://www.rallycongress.com/no2tradertax/1536/tel-congres-to-block-trader-tax/  and email your opinion to our elected officials.  It seems as though Washington is of the belief that taxing speculation will "get back" at the Wall Street crew that caused the problems that we face, but in our opinion doing so will be harmful to Main Street. 

The March 30 year Bond has experienced a few consecutive big ranging days, but have essentially fallen flat as option expiration approaches.  The quieter the trade, the more potential there is for a considerable breakout of the range.  We see significant support at 125'01 and resistance near 131 but aren't comfortable speculating on a direction.  In more normal conditions, this would be a great time to be long volatility through an option strangle but option premiums are still overpriced compliments of volatility seen in late  2008.  Sidelines...

* Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data.  However, market analysis and commentary does.

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.

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*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.