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The Bond Bulletin

Treasuries mixed ahead of data and holiday

Thu, Jul 2 2009, 00:56 GMT
by Carley Garner

DeCarley Trading

Bond and note futures traded mixed as traders spent the day squaring positions ahead of the long holiday weekend and tomorrow's non-farm payrolls data. The report is typically released on Friday but the government has adjusted the release date in observation of the 4th of July and the fact that the U.S. markets will be closed (for the most part). I can remember a few occasions in which market moving economic announcements were made on days in which the NYSE was closed, but various futures markets were open for abbreviated sessions. It typically isn't an ideal trading environment, luckily Friday won't be such a case.

Today's trade was a roller coaster of emotions for those with Treasury positions on. Although a relatively narrow range, intraday trade was highly volatile. Some of this was at the hands of the spurts of economic data hitting the airwaves.

Early this morning, ADP announced their prediction of a draw of 473,000 jobs in the U.S. economy. Later we heard that construction spending was slightly lower than anticipated but the ISM manufacturing index was a little higher; pending home sales also saw a minor improvement. In a nutshell, the news was mixed and released bits at a time to create a hotbed of indecisive trade.

Also adding to the day's uncertainty, Reuters reported a story claiming that China wants to rekindle talks of a replacement reserve currency at the G8 meeting. The news send the dollar lower and the bonds followed. Chinese concerns over the health of the dollar may eventually lead to liquidation of their massive U.S. debt holdings. If this happens, the Fed's Treasury buying program will be nearly powerless.

As it turns out, our market analysis played out relatively well over the most recent trading sessions. On Friday of last week we mentioned "... we could be in the process of forging a temporary high in bonds and notes." And later added, "We see strong resistance in bonds near 119'17, but wonder if we will even see that high."

Unfortunately, the picture isn't so clear from here. Overall, I still feel like Treasuries can go much higher in the coming month or months. However, the recent rally has been swift and significant resistance remains in the mid 119'15's in the long bond. I will refrain from making any bold calls until later next week, when some liquidity comes back to the marketplace. However, my best guess is that we could be in store for a test of the 119'16 resistance area.

We also noted resistance in the 10-year note last week near 116'25, which held nicely. It now seems like we could be headed for the 117 area. Likewise, we think that the 5-year note could see the mid 115's soon.

That said, we don't recommend trading until next week (unless of course you just can't help yourself). Chances are that most of the traders still involved in the markets, will be long gone soon after the employment report in the morning.

Yesterday we mentioned that we liked the idea of selling the 124/125 calls on continued strength. Our clients were able to sell the August Bond 124 calls today for 20 ticks. If you would like to play it a bit safer, you may want to hold out for the chance to sell the 125's for similar pricing.

We see strong resistance in bonds near 119'17, but wonder if we will even see that high. Note traders should look for resistance near 116'25. The 5-year note could be getting toppy near 115. If you happen to have the 5-year note trade recommended last month, we recommend getting out at or near current levels with a small loss. We may even consider recommending a short position depending on how things look early next week.

If you have missed this newsletter in recent days, we apologize for the inconvenience. Unfortunately, we have limited time and sometimes have to prioritize. Keep in mind that clients of DeCarley Trading were, and are always, welcome to contact us for guidance above and beyond this newsletter. If you aren't already trading with us, perhaps you should be.


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



Treasury Bond and Note Option Trading Recommendations
**There is unlimited risk in naked option selling.

June 26th - We recommended that our clients sell the August Bond 124 calls for 20

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.

June 29 - Our clients were recommended to sell September Eurodollar futures while buying a 9937.5 call as insurance. The calls were getting filled near 7 ticks, and the futures near 9933. This makes the total risk on the trade at expiration $287.50 before commissions and fees.

Published on  Thu, Jul 2 2009, 01:05 GMT