Bonds rally as investors adjust portfolios in light of earnings reports
Treasury trade was due for a corrective bounce and traders took advantage of the data and Fed free day to relieve oversold status. Relatively light trading action likely lead to the buying as stops were run and shorts were forced to cover.
I had been looking for a temporary low and a subsequent rally to 117 in the long bond and it finally seems underway. Unfortunately, I was also looking for one more probe at the lows before the recovery ensued. Thus, we may have missed our opportunity to re-sell the November 111 puts. However, barring any dramatic slide in equities, I have a feeling that this correction will be relatively short lived an opportunity will be presented in the near future.
Also adding fuel to the Treasury rally fire, the U.S. greenback had a great showing. The December dollar index futures were up over a full handle to trade near the 85 mark for the first time this year. Strength in the dollar signals stability in domestic financial markets and could lure foreign investment back into U.S. backed fixed income securities. Nonetheless, the consensus seems to suggest that dollar strength against the other major currencies is based on pessimism in foreign economies as opposed to greenback strengths.
Now that the short covering rally is underway, don't be surprised to some follow through on the long bond as it has suffered in excess relative to the short end of the curve. However, Treasury notes may struggle to get above the mid 114 area. If it does, which I am not currently counting on but could happen, 117'26 is the next target. I instead, I think it is more realistic to assume that the overall trend is still lower and this corrective bounce will soon fizzle out.
Just as we missed our opportunity to re-sell the bond puts, we recommended getting out of the 10-year note prematurely. Nonetheless, market conditions are challenging and we felt it better to be safe by locking in small profits than rolling the dice on hopes of something more.
Treasury Bond Option Trading Recommendations
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Treasury Bond and Note Futures Trading Recommendations
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Senior Analyst / Commodity Broker
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