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Fight between risk on/off

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May 12, 2011

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Fight between risk on/off

Bonds and notes rallied in overnight trade, but as stocks and commodities recovered the flight to quality bid in Treasuries faded.  However, it was a dismal auction in the 30-year bond that triggered the final blow. 

The Treasury auctioned $16 billion in 30-year bonds at a rate of 4.38% and a bid to cover of just 2.43 (the average is closer to 2.70).  Indirect bidders (foreign buyers) only accounted for 33% of the bids vs. 47.2% in the last round and a 10-auction average of 40.9%.  Yikes!

In economic news, there was really no reason to make any dramatic changes in outlook for Treasuries.  Most of the data was mixed and near expectations.  Specifically, initial claims for jobless benefits were reported at 434,000 a little worse than the expected 423,000 but much better than last week's horror show of 474,000. On the other hand, core PPI showed a moderate uptick in inflation to essentially cancel out any bullish bias the jobless claims numbers might have provided.  Traders will be eagerly awaiting tomorrow's CPI news which is based on pre-commodity blow-up data and will likely show a slight hint at inflation. 

We are maintaining our bearish bias in this complex for now,  but cannot rule out at least one more last hoorah rally.  If this occurs, look for resistance in the June 30 year bond just over 125 and in the 10-year note near 123.  If the market corrects, support will be 122 and 120'28, respectively.

From yesterday's newsletter but still valid:

Speculation has run rampant in the currency and commodity space and the unwinding of that is finally coming to roost.  We aren't surprised to see commodities and the Euro melt-down, we had been looking for such a move.  However, we are a bit surprised to see Treasuries completely avoid the storm. 
After all, bonds and notes enjoyed the fruits of QEII along with other asset prices as well as benefited from a weaker Dollar.  Logic would have called for Treasuries to fall along with other asset classes in conjunction to the Dollar rally, but as we are seeing, that isn't the case.  Nonetheless, it might be what is keeping a cap on the flight to quality rally. 
* 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. 

**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.

5-5-2011 - Clients were advised to sell the July 280 calls for 24 ticks or better.

(Our clients receive short option trading ideas in other markets such as gold, crude oil, corn, soybeans, Euro, Yen, and more.  Email us for more information)

Carley Garner
Senior Analyst / Commodity Broker
DeCarley Trading
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.