carleygarner
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January 26th, 2009
Higher stocks and existing home sales data keep Treasury bears in control
U.S. backed Treasuries continued to slide on Monday as offered global bonds and slightly optimistic economic data added to supply concerns. Existing home sales data surpassed analyst estimates, but the buying interest in real estate was clearly due to highly discounted pricing and not necessarily healthy market fundamentals. Although, at this point we will all take what we can get.
The government auctioned $8 billion in 20-year TIPS with a decent showing. However, this is only the beginning. It is believed that there will be another $70 billion in auctions this week and other $70billion in the coming weeks. Clearly, the massive supply of U.S. Treasuries has kept the bears in control, but supply is already getting "old" and accordingly has been priced into the market (in my opinion). It seems as though the supply story may have created too many bond bears and as the market continues to grind lower the potential for a large and swift short covering rally intensifies.
If you recall, traders were buying heavily on rumors that the Federal Reserve was buying securities in order to artificially inflate rates. Once the Fed actually admitted to their intention to do so, it had already been accounted for in pricing and traders were already focused on the next theme. While supply concerns are the story of the month, this may not be the case much longer.
Much of the fundamental news remains highly bearish. For example, yields are still relatively low and opportunity in other asset classes will continue to lure bondholders elsewhere. Also, massive increases in the money supply that have taken place will eventually result in massive inflation pressures. This may not be an immediate issue, but will eventually come into play and bond traders tend to price in fundamentals before they materialize not after. For such reasons, we remain long-term bearish the Treasury market and believe that market prices and yields could eventually make their way to levels seen prior to the "Treasury Bubble".
From a much shorter perspective, we acknowledge that a moderate temporary bounce could be in store for the markets immediately but we are looking for the March 30-year bond to reach 126'06 in the near future. We expect the 10-year note to see 120'16 in the coming week or weeks. At such levels, it seems as though we may become short term bullish.
Treasury Bond and Note Option Trading Recommendations
**There is unlimited risk in naked option selling.
Flat
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.
December 17 - Clients were recommended to Sell March futures near 98.84 and buy the March 9875 call for 21. The total risk is $300 plus commissions and fees (2 of them), profit potential is theoretically unlimited, and this trade gives you three months in the market!
• January 8 - If prices rally to 9915, this may be a good opportunity to liquidate the long call at a profit and hold onto the short futures contract.
• January 9 - Those that took the original recommendation were encouraged to take profits on the long March Eurodollar 9875 call as noted in yesterday's report. It was also possible to replace the protection with the cheaper February Eurodollar 9912.5 call.
January 9 - If you didn't participate in the original Eurodollar recommendation, you may want to consider a similar trade. This morning we were recommending that our clients sell the March futures contract near 99.16. Those that were uncomfortable with a naked short were advised to purchase the February Eurodollar 9912.5 Call for about 13 points or ($325). This limits the risk to the amount paid for the option minus the difference in the futures fill and option strike price. Thus, assuming the fills noted above the risk would be about $237.50 plus transaction costs.
• January 15 - Clients were recommended to buy the futures contract back at 98.93, assuming the fills above this locks in a profit of 25 points on the futures contract or $575. However, this doesn't consider the loss on the long call. Nonetheless, it guarantees a profit of at least $300 before commissions and fees even if the call expires worthless. Hopefully a market recovery will allow for exit of the call at a better price.
*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.
Higher stocks and existing home sales data keep Treasury bears in control
U.S. backed Treasuries continued to slide on Monday as offered global bonds and slightly optimistic economic data added to supply concerns. Existing home sales data surpassed analyst estimates, but the buying interest in real estate was clearly due to highly discounted pricing and not necessarily healthy market fundamentals. Although, at this point we will all take what we can get.
The government auctioned $8 billion in 20-year TIPS with a decent showing. However, this is only the beginning. It is believed that there will be another $70 billion in auctions this week and other $70billion in the coming weeks. Clearly, the massive supply of U.S. Treasuries has kept the bears in control, but supply is already getting "old" and accordingly has been priced into the market (in my opinion). It seems as though the supply story may have created too many bond bears and as the market continues to grind lower the potential for a large and swift short covering rally intensifies.
If you recall, traders were buying heavily on rumors that the Federal Reserve was buying securities in order to artificially inflate rates. Once the Fed actually admitted to their intention to do so, it had already been accounted for in pricing and traders were already focused on the next theme. While supply concerns are the story of the month, this may not be the case much longer.
Much of the fundamental news remains highly bearish. For example, yields are still relatively low and opportunity in other asset classes will continue to lure bondholders elsewhere. Also, massive increases in the money supply that have taken place will eventually result in massive inflation pressures. This may not be an immediate issue, but will eventually come into play and bond traders tend to price in fundamentals before they materialize not after. For such reasons, we remain long-term bearish the Treasury market and believe that market prices and yields could eventually make their way to levels seen prior to the "Treasury Bubble".
From a much shorter perspective, we acknowledge that a moderate temporary bounce could be in store for the markets immediately but we are looking for the March 30-year bond to reach 126'06 in the near future. We expect the 10-year note to see 120'16 in the coming week or weeks. At such levels, it seems as though we may become short term bullish.
Treasury Bond and Note Option Trading Recommendations
**There is unlimited risk in naked option selling.
Flat
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.
December 17 - Clients were recommended to Sell March futures near 98.84 and buy the March 9875 call for 21. The total risk is $300 plus commissions and fees (2 of them), profit potential is theoretically unlimited, and this trade gives you three months in the market!
• January 8 - If prices rally to 9915, this may be a good opportunity to liquidate the long call at a profit and hold onto the short futures contract.
• January 9 - Those that took the original recommendation were encouraged to take profits on the long March Eurodollar 9875 call as noted in yesterday's report. It was also possible to replace the protection with the cheaper February Eurodollar 9912.5 call.
January 9 - If you didn't participate in the original Eurodollar recommendation, you may want to consider a similar trade. This morning we were recommending that our clients sell the March futures contract near 99.16. Those that were uncomfortable with a naked short were advised to purchase the February Eurodollar 9912.5 Call for about 13 points or ($325). This limits the risk to the amount paid for the option minus the difference in the futures fill and option strike price. Thus, assuming the fills noted above the risk would be about $237.50 plus transaction costs.
• January 15 - Clients were recommended to buy the futures contract back at 98.93, assuming the fills above this locks in a profit of 25 points on the futures contract or $575. However, this doesn't consider the loss on the long call. Nonetheless, it guarantees a profit of at least $300 before commissions and fees even if the call expires worthless. Hopefully a market recovery will allow for exit of the call at a better price.
*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.
