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The Bond Bulletin

Treasuries extend rally, long bond 120?

Thu, Jul 2 2009, 20:53 GMT
by Carley Garner

DeCarley Trading

Painfully light volume and slightly bullish news was all that it took for the Treasury bulls to retest recent highs. A horrid, but better than expected, employment report prompted moderate safe haven buying across the curve but the momentum wasn't as swift as many would have thought given weakness in equities.

The session was plagued with light volume, but that isn't a surprise. Hopes are for a return of liquidity come Monday morning, but my guess is that things will remain quiet until mid-week. That said, we are still in the midst of the summer doldrums and at the tail end of some of the most volatile markets in history. The real trading volume will take several months and maybe even years to return to the marketplace.

Non-farm payrolls were surprisingly close to ADP estimates. Perhaps ADP has gotten better at forecasting...? According to the government, the U.S. economy lost 467,000 jobs last month and the unemployment rate ticked up to 9.5%. It seems that we are well on our way to double digits.

Putting a bit of a pinch on the rally was news of the next round of government issues. The Treasury announced that it will sell $35 billion in 3-year notes, $19 billion in reopened 10-year notes, $11 billion in reopened 30-year bonds and $8 billion of the 10-year inflation indexed notes. Although foreign demand for U.S. issued debt has been strong, investors may be getting "saturated".

It seems as though the long bond is headed toward 120 and should experience a moderate pullback from there. One the same token, we are now looking for a move to the mid-117's in the 10-year note. The 5-year note met our upside expectations and we have now turned bearish.

Yesterday I recommended not trading today, unless you couldn't help yourself. I guess we fell into that category. We had been waiting for weeks for the 5-year note to reach the mid-115's. Clients were recommended to sell futures near 115'15 and buy a protective call at a strike price of 115.5 or 116 depending on how much they were willing to risk etc. In both cases, the trade has limited risk in the amount of the premium paid plus or minus the difference between the futures entry and the strike price the call option. This is a strategy that we covered in our "Trade Like a Girl" article in SFO magazine and PFG webinar. Visit our websites to view an archive of the class. You can also read more about this strategy in my book, "Commodity Options", which is available through all major book outlets.

Oops, there was a mixup in yesterday's newsletter in which part of the newsleter written on June 26th, bled into Wednesday's commentary. We apologize for the confusion that this may have caused.

Enjoy your holiday weekend!



**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.

July 2 - Clients were recommended to sell the 5-year note near 115'15 and purchase either a 116 call or a 115.50 call for insurance. The trade offers limited risk with unlimited profit potential.

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, 21:00 GMT