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January 28th, 2011
Subdued response to turmoil for Treasury futures
Political protests (more like riots) in Egypt shook up the financial and commodity markets. Investors flocked from risk and into "stuff" (as Dennis Gartman calls it). In other words, investors put money into hard assets, namely gold and silver. In theory, the move should have triggered a large wave of quality buying in Treasuries but that just wasn't the case. However, there was a firm flight to quality bid in the U.S. Dollar and that leaves the door open for fixed income buying early next week should the equity slide continue.
On the news front, advanced 4th quarter readings on GDP were reported at 3.2%. This was far and away better than the previous 2.6% but shy of expectations at 3.7%. Nonetheless, it shows stability in the recovery and is bearish for Treasuries...it seems as though this was the news that took some of the steam out of today's upswing. That said, although the long bond ended the day with only moderate gains the March futures contract experienced a two-handle rally from the session low.
Negating some of the bearishness of the headline GDP was the chain deflator component of the report that portrayed much less inflation than was previously thought.
Keep an eye on the Yen and the US Dollar Index; during times of uncertainty quality bids often find their way into these currencies and investors will want a "low risk" place to park cash. Strength in these two futures could finally lead to an upside breakout in Treasuries.
Friday's trade was highly headline driven and trade in early next week will be dictated by what unfolds, or doesn't unfold into the weekend.
As we have been saying in recent newsletters, we prefer being bullish on large dips and long volatility. If you have any short options in this market, you might want to lock in profits or exit entirely. Treasury vol doesn't stay subdued for long...
Resistance still lies at 122'15ish in the 30 year bond, but if chaos ensues next week 126ish isn't out of the question. Similar levels in the 10-year note are 121'15 and 123'15.
* Due to time constraints and our fiduciary duty to put clients first, the charts provided in this newsletter may not reflect the current session data. However, market analysis and commentary does. Charts provided by Track 'n Trade, Gecko software.
**Seasonality is already factored into current prices, any references to such does not indicate future market action.
Treasury Bond and Note Option and Futures Trading Recommendations
**There is unlimited risk in naked option selling.
November 15- Clients were recommended to purchase a 5-year note futures near 119'19ish and purchase a 119'5 put for about 49. This trade enables traders to hold a long futures position for 40 days with risk limited to about $850 plus commissions (more or less depending on fill prices). This prevents traders from being stopped out prematurely and provides unlimited profit potential.
December 9 - Those participating in the 5-year note trade were advised (assuming they had the margin available and were comfortable with the risk) to exit the long put which was acting as insurance. The approximate profit on the put was $1,000 before commissions but this leaves a naked (unlimited risk) long futures and a sizable paper loss to overcome. The move makes it "easier" to recoup should the market decide to turn around.
Senior Analyst / Commodity Broker
Local : 702-947-0701
*Due to the volatile nature of the futures markets some information and charts in this report may not be timely.
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.