Moderate bounce but disappointing momentum in trade
Treasury trade simply hasn't lived up to equities when it comes to volatility but I don't think that you will hear any complaints. In recent weeks there have been several horror stories floating around the exchange floor of overleveraged stock index traders getting caught on the wrong side of a large move and losing all or more of their trading accounts.
The fixed income market maintained an overall positive tone throughout the day but I was disappointed in the lack of follow through buying. Projections in the 30-year bond reach as high as 117 and 117'28, however the lack of momentum has me second guessing my models. Likewise, given the magnitude of the drop in the 10 year note futures contract, 114'22 seemed a realistic target... But today's trade raises an eyebrow.
Massive government issues in an attempt to raise some of the liquidity that is being injected into the credit markets, fixed income securities are in abundance in the marketplace. It seems as though supply concerns in the Treasury market are keeping a lid on the buying and for good reason.
Economic data continues to be bond friendly but without much of a market response. For example, the Philly Fed was reported to have experienced a rather embarrassing drop to -37.5; analysts were looking for numbers closer to -5. Likewise, the CPI data was in line with expectations suggesting that the inflation pressures have subsided.
The 30-year bond has quickly fallen out of favor relative to shorter maturities and other fixed income alternatives. While technical action supports the idea of higher prices, my gut tells me that without another equity market fallout this market will have trouble finding firm footing immediately. If you are short puts as recommended below, you should be profitable and may want to consider offsetting the position to lock in a profit. It may be possible to re-sell the same option later on. We may be setting up for another move lower to prices near 112.
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. 13th).
Oct. 14 - Place an order to buy these back at 10 or better.
Oct. 16 - Get out of this with a small profit, we may be setting up for another drop to 112.
Treasury Futures Trading Recommendations
**There is unlimited risk in trading futures.
Sept. 13th - 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.
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.
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.
