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October 21st, 2010

Sluggish Treasuries despite "risk off" trade

Investors look to finally be fleeing hard assets such as commodities but the money sure isn't flowing into Treasuries.  A mid-day comeback in the Dollar, suggests traders could be looking for a place to park money in "other" U.S. Dollar denominated assets in the coming days;  however, stocks could be a little pricy...the next logical place would be bonds and notes.  With yields as such paltry levels, it isn't surprising to see hesitation but if historical tendencies has anything to say about it traders will be buying Treasuries in the short-term. 

The Fed is scheduled to resume its POMO program tomorrow, and as we have noted this tends to force asset prices higher, the dollar lower and could also help to keep bonds and notes from seeing a deeper correction. 

Weighing on fixed income prices were a handful of decent economic numbers.  Not only do the better than expected figures ease concerns over the economy but they also act as a deterrent for additional quantitative easing.  That said, as we mentioned in the Stock Index Report yesterday...the Fed has "printed" its way into a corner now that the markets have priced in a good portion of the Treasury buybacks and they probably wouldn't want to disturb a sleeping giant. 

The Labor Department reported a draw of 23,000 jobless claims to 452,000 and the Conference board's index of leading indicators was up .3%.  The Philly Fed regional index posted a positive 1.0, despite a previous reading in the red. 

From yesterday's newsletter:

The typical stocks vs. bonds relationship seems to be gone with the wind, so we are forced to try to look at the Treasury market as a free-standing asset class.  At this time, it appears as though the path of least resistance will be higher given the slough of negative data, a trend is your friend mentality (for now) and investors still prefer the security of fixed income.

We weren't necessarily expecting today's dip, but feel as though it could eventually turn into an opportunity for the near-term bulls.  The long bond looks to be headed to 131ish, and could possibly trade as low as 130 but we like the idea of being cautiously bullish from such pricing.  On the upside, we will be looking for resistance near 133'06 but feel as though 135 is a real possibility in the coming weeks. 

Support in the 10-year note lies at 126 and again in the mid-125's; if things do turn around we will be looking for 128 on the upside.

* 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.  Charts provided by Track 'n Trade, Gecko software.

Treasury Bond and Note Option and Futures Trading Recommendations

**There is unlimited risk in naked option selling.

October 8 - Clients were advised to purchase the December 121.5 call and sell the futures.  The total (limited) risk on the combo is ranges from $500 to $600 depending on fills.  This trade has 50 days to expiration and opens the door for theoretically unlimited profit potential. 

*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.