Coming into the session, it looked like an oversold bounce would be the theme for today's trade. Anticipation of expectedly weak economic data likely prompted the shorts to reconsider their stance given the recent downdraft in Treasury futures. However, what may have been a temporary lapse of judgment brought the long bond to 113'08.
The two biggest burdens on Treasury prices seem to be an oversupply of fixed income as the result of the Fed issuing many more than expected securities and the slow but sure easing in the credit markets. Moderate drops in the Libor rate support the theory of slightly greased gears in interbank lending.
For the first time in days, the market was provided with economic data to chew on. The headline PPI fell .4% despite an uptick of .4% in the core reading. Ironically, the tamer than expected inflation data didn't prompt bond buying. Also helping the bull camp, but not the market, retail sales dropped 1.2% nearly double analyst expectations and was said to be the largest drop since mid-2005.
The futures markets look to be pricing in another quarter point cut by the Fed, but the chances of a 50 basis point cut are creeping back into the marketplace. As of this morning, there seemed to be a 20% possibility of a half point cut priced into the Fed Funds futures.
Insiders described trade as "light and lazy". It was the long end of the yield curve that took a brunt of the selling in early trade. Shorter maturities traded relatively quietly with a slight upward bias. The lows seen in the 30-year bond seem to be a bit excessive leaving the market ripe for a continuation of the short covering bounce that began in late session trade.
My long-term target of 112 is approaching much faster than I had anticipated. If you sold the 111 puts as recommended, you should be near break-even and I recommend holding on for now. My clients that opted for the long Ten-year note trade were recommended to purchase the November 112 put for protection. Those with the margin and or willing to accept the risk of trading the long side without stops or protection can certainly do so.
Treasury Option Trading Recommendations
**There is unlimited risk in naked option selling.
Oct. 10 - Sell the October 111 puts for 25 or better. You should have been filled on this today (Oct. 13).
Oct. 14 - Place an order to buy these back at 10 or better.
Treasury Futures Trading Recommendations
**There is unlimited risk in trading futures.
Sept. 13 - Buy 1 December 10 year note futures at 111'24 OB
Oct. 14 - This should have been filled today.
Oct. 15 - Clients were advised to buy the 112 puts for insurance for about 1'03 or $1,047. A little pricy, but worth the piece of mind; if the market rallies it may be a good idea to take a profit on the futures and hold the put looking for another probe at the lows.
Senior Analyst / Commodity Broker
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 because of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.