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October 28, 2011

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Seasonals suggest Treasury futures dip was a "buy"

If you have been following this report over the past week or two, you know we had been (annoyingly) repetitively noting the possibility of a round of sell stop running that would put the 30-year bond just under 136 and the 10-year note near 127.  Finally, after weeks of sideways trade the market seems to have flushed out the week longs and could be headed into higher territory (lower yields).   

We realize that predicting lower yields with the long bond near 3.5% and the 10 year near 2.5% isn't a popular school of thought but if history means anything, this isn't the best time of year to  be bearish Treasuries (bullish yields).  In addition to seasonals, we are beginning to hear pessimistic chatter regarding the governments "super committee" created to cut budget expenditures.  Similar to the market's infatuation on the now forgotten debt ceiling debate, it seems the door could be open for unnecessary political drama surrounding the looming deadline for the committee to make progress on the deficit.  Perhaps some flight to quality buying could move into Treasuries; we believe this despite the obvious fact that such a debate would be a negative for the U.S. credit rating.  If you recall the August downgrade of U.S. debt (it is a day I'll never forget, but would like to), Treasuries soared.   

The day's economic news was overall bearish for Treasuries, but following yesterday's bloodbath fundamentals were trumped by technical trade and end-of-week position squaring.  Accordingly, we could get some back and filling trade on Sunday night/Monday morning, but overall we are looking for higher prices.  The first target in the 30-year bond future will be 139'20, but a close above this points to another run at the 144's (and we think we will get it)!  If you are trading the 10-year note, look for an initial move to 128'25 and a possible run to 131ish. 

 **Seasonality is already factored into current prices, any references to such does not indicate future market action.  

Treasury Bond and Note Option and Futures Trading Recommendations

**There is unlimited risk in naked option selling.  

10-27 Clients were recommended to sell the December 30-year bond 130 puts for about 28 ticks. 

In other markets....

 10-11 Clients were recommended to sell strangles in the November Euro (142/128 for conservative traders and 140/130 for aggressive traders), or December crude oil (98/67 for conservative traders and 96/70 for aggressive traders).   

(Our clients receive short option trading ideas in other markets such as gold, crude oil, corn, soybeans, Euro, Yen, and more.  Email us for more information)   

*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.