Increased supply and a lack of demand weigh on Treasuries.
The Fed's support of the commercial paper market and seemingly relentless goal of rescuing us from the credit crisis has reversed some of the appeal in Treasuries. With moderately more confidence in the credit markets, investors are realizing that the dismal rates of return offered by Treasuries at such lofty levels may not be worth the effort.
The new Fed backing in the commercial paper market is finally luring traders and investors back with short maturities and higher relative yields. The rate cuts may have gotten more press, but it was yesterday's announcement in commercial paper that may have done the trick.
In theory, higher yields and lower prices across the Treasury curve suggest that the wheels of the credit market are beginning to spin once again. The flow of money out of Treasuries didn't seem to make it into the stock market; the cash seems to be heading toward slightly riskier fixed income assets such as government backed commercial paper.
Many are wondering how a surprise rate cut could have resulted in a large drop in Treasuries but the truth is that the market had priced in the cut long before it became a reality. Recent strength in bond prices can be attributed partly to anticipation of lower target rates. Now that they are here, there isn't much to look forward to, as the Fed will soon be running out of bullets. Is it the dog wagging the tail or the tail wagging the dog?
The Fed surprised the market by offering additional supply to the bond market. The unexpected move resulted in a disappointing auction and increased supply concerns...and ultimately was a contributing factor in today's nearly 3-handle plunge.
Treasury Option Trading Recommendations
**There is unlimited risk in naked option selling.
October 7 -
Flat
Treasury Futures Trading Recommendations
**There is unlimited risk in trading futures.
October 6 - Sell 1 Five Year note at 115'13 OB
· We missed it this time, cancel the order.
Carley Garner
Senior Analyst / Commodity Broker
DeCarley Trading
cgarner@DeCarleyTrading.com
www.DeCarleyTrading.com
There is substantial risk of loss in trading futures and options.
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