April 8th, 2009

If you like this newsletter, you will love my book "Commodity Options"!  Now available at any major book outlet.

Reminders of Quantitative easing help bond rally

Treasury bonds and notes posted a positive session in light trade as the market is constantly reminded of the Fed's pledge to keep a cap on interest rates.  Additionally, the day's record $35 billion auction of 3-year notes seemed to be a success. 

Traders likely treated the release of the FOMC minutes as their cue to evacuate ahead of the holiday weekend.  Tomorrow is a shortened day for bond traders and Friday will be "dark" (as we say in Vegas).  There was an obvious decline in volume following the announcement and I have a feeling that tomorrow will see little action. 

According to the Fed, "Credit conditions remain very tight, and financial markets remained fragile and unsettled, with pressures on financial institutions generally intensifying this year."  However, bond and note traders were only paying attention to the comments at the end which reminded the markets that the Fed will buy up to $300 billion in longer-term Treasuries and $850 billion in agency mortgage debt. 

In the last newsletter we stated:

We are approaching the market this week with a slightly bearish tilt as we still believe that the 30-year bond will trade near 124 in the coming sessions.  That said, there is critical resistance near 127'25 and the market must trade consistently below it in order to avoid another run at the highs. 

Consequently, the T-Bond is trading near our critical pivot area of 127'25.  We still feel as though failure at current levels suggest that our 124 objective will be met but thin markets leave the door open for many possibilities. 

In regards to the 10-year notes, we noted:

The notes on the other hand have some room to move on the upside before violating the down-trend.  With resistance at a distant 123'02 we are looking for a continuation of the selling pressure to lead the note to the mid-120's.

Similar to the long bond, the 10-year note is trading at or near our "make or break" level.  There is some risk of a breakout higher, but we remain cautiously bearish and believe that the odds favor a move to 120'20ish. 

The interest rate markets have become snoozers in terms of trading opportunities as our models have produced very few signals.  However, we are patiently awaiting an opportunity that we can be confident in.  Stay tuned.

* 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.

April 6 - We may be looking to sell the May Bond 119 puts for 20; it will take considerable weakness to get filled.

Treasury Bond and Note Futures Trading Recommendations

**There is unlimited risk in trading futures.

Flat

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.