The Bond Bulletin by Carley Garner

[carleygarner]

October 2nd, 2008


Non-farm payrolls...Congress...Looming


The financial markets are overloaded with uncertainty and event risk is high. Unless you are a much better trader than I am, you are likely better off on the sidelines. I would like to see the Treasury complex commit itself to a direction. The recent sideways action has likely been beneficial to short strangle traders but I fear that a large directional move may be coming making such a strategy too risky for my blood. Naturally, this philosophy often means "missing" an opportunity but my intention is for my followers to "miss" the despair.

I could talk about today's bond friendly data or the deflationary trade in commodities at the hand of a stronger dollar but tomorrow's trade may not come down to fundamentals. Fear and greed have been playing a much more dominant role than we have seen in the past and it is likely that excessive volatility and irrational trade will be the result. Don't expect bonds or notes to play by "the rules" in tomorrow's session. Keep in mind that despite seasonal tendencies and fundamental pressures, the long bond could see levels as high as 122'11 or as low as 115'27 in the coming days and the direction is largely dependent on the actions of our elected officials. All we can do is hope for the best but be prepared for the worst.

Another wild card in tomorrow's session will be the monthly employment report. Estimates of tomorrow's non-farm payrolls seem to be centered around a draw of 100,000 jobs. It seems as though with expectations so low, a number in line with or closer to ADP's estimates of 8,000 would be significantly bond bearish. However, trade may not be willing to pick a direction before Congress votes.

If we do get an extreme price move in either direction, it may be a good time to shop for directional short option plays. Let's see what tomorrow brings...




Treasury Option Trading Recommendations
**There is unlimited risk in naked option selling.

Flat

Treasury Futures Trading Recommendations
**There is unlimited risk in trading futures.

Flat






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.

 

[carleygarner]

October 6th, 2008


Bonds benefit from disaster in global equities.


As the financial and commodity markets seem to be in the midst of a global meltdown there is one complex that is benefiting ; Treasuries. Plummeting equities are promoting flight to quality Treasury buying but sliding commodities is providing fuel to the fire in the form of deflationary pressures in the marketplace.

There weren't any economic releases, leaving all of the focus on inter-market relationships. I give Treasury traders credit for keeping relatively cool heads in light of the massive confusion and volatility surrounding. The complex traded drastically higher on the session, but the daily progress seemed rather orderly given the circumstances.

Under normal circumstances, I would be delighted at the bearish opportunity that current market valuations provide. However, just as many seem to have lost confidence in the financial system I have grown overly cautious regarding trading models and typical market behaviors. The vast number of uncertainties and the fact that we are dealing with a magnitude of issues not seen in my lifetime keeps me on the defensive.

In previous reports, I noted the potential for the long bond to reach 122. Today's high was just over 122 and ended up being an opportunistic sell for those that had the guts to participate. However, I have since adjusted my target upward. It seems like 122'24 is a realistic expectation and at this level it may be seen as a great place to begin implementing a bearish strategy. With that said, don't forget about the September 16th high of 123'27.5. Markets have a way of sniffing out all of the stops and light handed traders. If you chose to play the short side at 122'24 I recommend that you approach the trade with the intention of taking a quick profit if possible. The current climate doesn't seem conducive for position trading.

You may want to try to sell the November 133 calls for 25 or better. It will take additional strength to get this filled.




Treasury Option Trading Recommendations
**There is unlimited risk in naked option selling.

October 6 - Sell the November T-Bond 133 call for 25 ticks or better, be careful with this one...

Treasury Futures Trading Recommendations
**There is unlimited risk in trading futures.

October 6 - Sell 1 Five Year note at 115'13 OB






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.

 

[carleygarner]

October 7th, 2008


Treasuries anticipate another Fed Funds target cut.


Inflation concerns have melted along with commodity prices and bond prices have been a direct beneficiary of the change in heart. Treasury traders have essentially priced in a 50 basis point cut in the next FOMC meeting and have partially priced in another quarter point in the subsequent meeting.

In overnight trade, fixed income securities were offered on news of a large rate cut in Australia. As you have likely heard, the U.S. financial markets and analysts are leaning toward a global rate cut as an effective tool to combat the worldwide credit crunch. Despite a lack of action by other foreign banks, chatter seems to suggest that the market will get what it is asking for. While the cuts may not necessarily be coordinated a majority of central banks are orchestrating their own plan.

The early morning selling was swift and cam on the heels of a Fed announcement regarding their intention to essentially back commercial paper in an effort to facilitate the flow of money through the credit markets. The news was seen as an immediate dissipation of risk and triggered speculation of cash flows away from Treasuries.

I see resistance in the long bond near 122'27 and support at 119'10, while the 10 year note could trade has high as 118'28 and should find near term support near 116'08.

In yesterday's report I recommended to sell the November 133 calls for 25...However, I must have been working on a lack of sleep as I was clearly looking at the December premium. Change this order to sell the November 129 calls for 25. This may or may not be possible to get filled on depending on what unfolds in the coming days in terms of the Fed, global central banks, etc. However, if the market does spike higher I believe that this would present a great opportunity for the bears. If Treasuries continue to drop from here so be it, we will try to catch them on the other side of the range.





Treasury Option Trading Recommendations
**There is unlimited risk in naked option selling.

October 7 - Sell the November T-Bond 129 calls for 25 ticks or better, be careful with this one...

Treasury Futures Trading Recommendations
**There is unlimited risk in trading futures.

October 6 - Sell 1 Five Year note at 115'13 OB






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.

 

[carleygarner]

October 8th, 2008


Increased supply and a lack of demand weigh on Treasuries.



The Fed's support of the commercial paper market and seemingly relentless goal of rescuing us from the credit crisis has reversed some of the appeal in Treasuries. With moderately more confidence in the credit markets, investors are realizing that the dismal rates of return offered by Treasuries at such lofty levels may not be worth the effort.

The new Fed backing in the commercial paper market is finally luring traders and investors back with short maturities and higher relative yields. The rate cuts may have gotten more press, but it was yesterday's announcement in commercial paper that may have done the trick.

In theory, higher yields and lower prices across the Treasury curve suggest that the wheels of the credit market are beginning to spin once again. The flow of money out of Treasuries didn't seem to make it into the stock market; the cash seems to be heading toward slightly riskier fixed income assets such as government backed commercial paper.

Many are wondering how a surprise rate cut could have resulted in a large drop in Treasuries but the truth is that the market had priced in the cut long before it became a reality. Recent strength in bond prices can be partly attributed to anticipation of lower target rates. Now that they are here, there isn't much to look forward to as the Fed will soon be running out of bullets. Is it the dog wagging the tail or the tail wagging the dog?

The Fed surprised the market by offering additional supply to the bond market. The unexpected move resulted in a disappointing auction and increased supply concerns...and ultimately was a contributing factor in today's nearly 3 handle plunge.




Treasury Option Trading Recommendations
**There is unlimited risk in naked option selling.

October 7 -

Flat

Treasury Futures Trading Recommendations
**There is unlimited risk in trading futures.

October 6 - Sell 1 Five Year note at 115'13 OB
• We missed it this time, cancel the order.








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.

 

[carleygarner]

October 9th, 2008


Slight easing in the credit markets and sell stop running keeps Treasuries down.


The Treasury markets continue to price in another quarter point rate cut by the Fed and likely the same action by the European Central Bank. Injected liquidity along with aggressive rate cuts is being seen by a step in the right direction; accordingly the flight to quality bid is being sucked out of the complex. Ironically, the equity markets haven't come to the same conclusion. While bond traders are welcoming the slow but sure improvements in the credit markets, equity traders are growing increasingly uncomfortable with the nearly unbearable pace of progress. Based on my analysis and assumptions, I believe that the bond market has it right this time.

There were a small handful of economic releases but the news was irrelevant given the trading environment.

It is nearly impossible to follow the fundamental drivers of bond futures due to the event risk involved. At any given time, there could be an announcement by the Fed or any other central bank that completely turns the picture. Therefore, I think it best to rely on technical action in the markets for guidance. As leaks and anticipation will often cause the market to move before the news ever reaches the public via media outlets.

With that said, barring any new unexpected fundamental changes, the 30 year bond futures should make its way lower to sub-116 levels. However, there may be a minor technical bounce in store before the next move lower. My first target is 115'14 while resistance will be found at 118'08 and 119'03. In a longer time horizon, I see the potential for the long bond to reach levels as low as 112. The 10 year note begins to become attractive on the long side on a temporary basis from 113'07. In the meantime, resistance comes in near 115'17 and again at 116'01.

I like selling the October 30 year bond options; you may be able to get 25 for the 111 puts if the market continues to trade lower to support.




Treasury Option Trading Recommendations
**There is unlimited risk in naked option selling.

September 10 - Sell the October 111 puts for 25 or better. It will take additional weakness to get filled.

Treasury Futures Trading Recommendations
**There is unlimited risk in trading futures.

Flat






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.

 

[carleygarner]

October 10th, 2008


Treasuries liquidated to free cash.


The word on the street is that investors and funds are liquidating Treasuries as a means of freeing up cash flow. As a result, the bond market failed to see much of a bid despite the unimaginable turmoil unfolding on Wall Street. Another telling story regarding the dis-connect between what seem to be market fundamentals and price action; commodity prices plunged across the board to alleviate inflation pressures once again, yet Treasury futures trade didn't notice.

It has been a rough week for us, so I will keep this short and sweet. The 30 year bond futures have been trading very heavy in recent days. While they have already experienced a sharp drop in price and increase in yield I am expecting a bit more weakness in the coming days in light of a potential bounce in equities and the possibility of some progress being made in the weekend G7 meeting. I see the first area of support near 116, but believe that 115'03 is a much more promising buying opportunity.

The Ten year note futures reached a low of 112'20 and that seems to be enough to have fulfilled the markets digestive needs for now. However, if my assumptions are correct regarding the long bond trade in the notes may be destined for about 112'01 and become an attractive long at that level.

Have a nice weekend!





Treasury Option Trading Recommendations
**There is unlimited risk in naked option selling.

September 10 - Sell the October 111 puts for 25 or better. It will take additional weakness to get filled.

Treasury Futures Trading Recommendations
**There is unlimited risk in trading futures.

Flat





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.

 

[carleygarner]

October 13th, 2008


Anticipation of Money flowing out of Treasuries and into Equities; will it last?


Despite the cash market bond market being closed in observance of Columbus Day, the futures markets priced in the potential for portfolio adjustments. The new found stability (for lack of a better word) in the stock indices may lead money out of safe-haven assets and back into risky asset classes. Keep in mind that today's volume was typical of holiday trade, extremely light. The moves in both equities and Treasuries may have been exaggerated making tomorrow's session a bit more credible.

Unexpected progress stemming from the G7 meeting over the weekend in Washington dramatically reduced the appeal of government backed Treasuries. After all, there are now government "guaranteed" securities offering much better yields with seemingly little additional default risk.

In terms of economic news, there is very little for the market to chew on until Wednesday but things will pick up quickly from there. Treasury futures traders are looking forward to inflation data, housing starts and consumer sentiment data.

In Friday's report I pointed out 115'03 as a promising buying opportunity but have since revised my figures to 114'15 (near today's low). The weakness displayed in today's session was somewhat orderly given the light volume and extremely heavy, but it seems as though we may be nearing a temporary low.

If you are a note trader, last week I pointed out that the 10 year futures looked to be headed for 112'01. As this level approaches, I still feel as though the contract is becoming attractive from the long side.



Treasury Option Trading Recommendations
**There is unlimited risk in naked option selling.

September 10 - Sell the October 111 puts for 25 or better. You should have been filled on this today (Oct. 13th).

Treasury Futures Trading Recommendations
**There is unlimited risk in trading futures.

September 13th - Buy 1 December 10 year note futures at 111'24 OB






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.

 

[carleygarner]

October 14th, 2008


Bond futures traders seemed to get it right yesterday.


Bond futures traders reacted to the G7 meeting without any guidance from the cash Treasury and credit markets due to the Columbus Day holiday. Based on today's relatively tame trade across fixed income assets, futures traders were relatively accurate in their assumptions.

Treasury futures traded in a surprisingly narrow range given the magnitude of the moves seen in equities. The long bond traveled from a high of 115'13.5 to a low of 114'14. By historical standards this would have been an exciting day in bond-land, but in today's environment it was considered sluggish.

Dragging on bond prices is the worldwide attempt to inject liquidity, and life, back into the credit markets. The result has been global weakness in government backed fixed income products. Adding to the pressures of an implosion of flight to quality buying, the government has issued unexpectedly high numbers of bonds creating somewhat of an oversupply

I am looking for tomorrow as it will kick start a plethora of economic data spanning through Friday morning. I think that it will be beneficial for the markets to have something other than the global credit crisis to guide trade.

According to sources, "funds" were selling in afternoon trade and this may be another sign of cash troubles. However, in terms of volume trade was relatively light and may have been artificially influenced.

It is important to note that many of the government interventions aimed at thawing frozen credit markets aren't working as quickly as many had hoped. In today's T-Bill auction, yields on new issues were still incredibly low while the yields on now government backed CD's such as the GSE's are carrying yields closer to 3%. The disconnect may cause some discomfort and a moderate bid in bond prices.

Today marked the fifth day of aggressive selling in Treasuries and while my overall target in the 30 year futures contract is near 112 it seems as though a temporary low is looming. 114 offers considerable market support. If you are participating in the short 111 puts as recommended below, I strongly suggest that you be willing to take a quick profit if it presents itself. Trade is sluggish and seasonal tendencies are pointing lower so a bounce seems likely but a full on rally may not be. Place an order to buy these back at 10 ticks or less.

Those trading 10 year note futures, I still feel confident in the recommendation to buy at 111'24 but the same mentality applies. Don't overstay your welcome!

Treasury Option Trading Recommendations
**There is unlimited risk in naked option selling.

October 10 - Sell the October 111 puts for 25 or better. You should have been filled on this today (Oct. 13th).
• October 14 - Place an order to buy these back at 10 or better.

Treasury Futures Trading Recommendations
**There is unlimited risk in trading futures.

September 13th - Buy 1 December 10 year note futures at 111'24 OB
• October 14 - This should have been filled today. Place an order to offset it







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.

 

[carleygarner]

October 15th, 2008


Another wave of selling in equities eventually lured short covering in Treasuries.


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 judgement 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.

October 10 - Sell the October 111 puts for 25 or better. You should have been filled on this today (Oct. 13th).
• October 14 - Place an order to buy these back at 10 or better.

Treasury Futures Trading Recommendations
**There is unlimited risk in trading futures.

September 13th - Buy 1 December 10 year note futures at 111'24 OB
• October 14 - This should have been filled today.
• October 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.







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.

 

[carleygarner]

October 16th, 2008


Moderate bounce but disappointing momentum in Treasury 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.

October 10 - Sell the October 111 puts for 25 or better. You should have been filled on this today (Oct. 13th).
• October 14 - Place an order to buy these back at 10 or better.
• October 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.

September 13th - Buy 1 December 10 year note futures at 111'24 OB

• October 14 - This should have been filled today.
• October 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.







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.

 

[carleygarner]

October 20th, 2008


Despite the bounce, the 30 year seems to be destined for 112.


Early morning gains in the 30 year bond all but fizzled as the close of trade approached. Aside from a healthy bid in the 10 year note, the rest of the yield curve traded similarly bearish. Signs of thawing credit markets and supply concerns are keeping Treasury prices under pressure.



While fundamentals are suggesting lower prices, technical and seasonal analysis is beginning to become temporarily bond friendly. With that said, it seems like the long bond is on a relentless pursuit to "knock out" sells stops below the July lows. If this is the case, we should see the December 30 Year Treasury futures trading in the neighborhood of 112'00 - 112'05.



I would recommend being a buyer of the 10 year note below 111, but have a hard time seeing it as a promising long at current levels. I would rather miss the up-move than be in the way of a flush. If I am right about the long bond, the 10 year note could easily follow.



Trading volume was on the light side, with patches of volume. The only economic data to speak off was the leading indicators index which suggested that the outlooks for the economy are slightly better this month than they were last.



Speeches delivered by Fed Chair Ben Bernanke and Treasury Secretary Paulson ultimately dominated trade. Bernanke's focus on a slowing economy temporarily aided the bond rally.



According to Paulson, in reference to TARP (Troubled Asset Relief Program), taxpayers are making an investment and the prospects. The reassurance seemed to pull some of the safe haven bid away from government backed fixed income securities.









Treasury Bond Option Trading Recommendations
**There is unlimited risk in naked option selling.



Flat



Treasury Bond and Note Futures Trading Recommendations
**There is unlimited risk in trading futures.



Flat








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.

 

[carleygarner]

October 21st, 2008


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 seems to finally be 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 ten 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
**There is unlimited risk in naked option selling.



Flat



Treasury Bond and Note Futures Trading Recommendations
**There is unlimited risk in trading futures.



Flat








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.

 

[carleygarner]

October 23rd, 2008


117 offered resistance, but it didn't last.


With very little economic data, a stock market in turmoil and Treasury option expiration looming, the stage was set for a wild trading day. It wasn't the daily price range of the long bond that had many raising an eyebrow but the speed and frequency of the moves in-between.

Our upside target in the 30 year bond of nearly 117 was reached in early trade and as we had predicted offered significant resistance. However, later in the day the market proved our assumptions of another move lower wrong. After paring gains, the long bond quickly made another run at the highs and ultimately traded above 118. The dramatic turnaround suggests that there are much higher prices to come. If you recall in yesterday's newsletter we pointed out that if 117 was broken, the next target would be 119'05 and we stand by that statement.

Equity trade continues to highlight action in the bond pits. Much of the late day buying in Treasury futures can be attributed to weaker stock prices. With that said, I am looking for weaker trade on Wall Street. If I am right about that, this bond rally should continue into next week.

Today's quick sell-off and stunning recovery is said to be the result of another hedge fund "blow out" combined with light volume. It was unclear as to whether it is believed that the fund sparked the selling or the buying, but insiders noted that something didn't "feel right". Adding to the net effect is the fact that volume was on the skimpy side.

The note will likely see prices in the mid 116's as soon as tomorrow but believe it or not may have the potential to see prices as high as 118. Likewise, while my target remains 119'05 in the 30 year bond futures, I can see potential for 122 once again depending on equity trade.








Treasury Bond Option Trading Recommendations
**There is unlimited risk in naked option selling.

Flat

Treasury Bond and Note Futures Trading Recommendations
**There is unlimited risk in trading futures.

October 23 - Sell a December Five Year Note at 114'22





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.

 

[carleygarner]

October 27th, 2008


Long bond leaning higher despite late session selling.


The long end of the curve is living up to expectations of it being the most sensitive to changes in market interest rates. The long bond rallied nearly two handles before giving back a majority of the gains. Shorter maturities experienced moderate gains in early trade, but found themselves near unchanged by the day's end.

New home sales and eventually new intraday highs in the S&P led to heavy trade in the bond pit. Last month's new home sales were reported to be at 464,000 nicely higher than the expected 450,000. Likewise, once the stock trading sessions abroad began winding down, the U.S. equity indices gained footing. The S&P traded well into positive territory to trigger some profit taking from long bond holders and erasing the need for a flight to quality for the remainder of the day's trade.

Perhaps the continued bid in the greenback helped to keep Treasuries afloat. The U.S. dollar enjoyed another day of dramatically favorable trade. With the domestic currency coming back to stability, foreign fixed income investors may look to U.S. Treasuries.

Coming into the session, I was leaning higher in anticipation of lower equities and supportive technical factors. While this strategy worked coming in, I am wondering if the bulls will manage to stay in control. Based on my analysis, the December 30 year Treasury futures will have to avoid a close, or sustained trading, beneath 116'27 to avoid substantial selling pressure. Similarly, the 10 year note futures will need to hold above 114'12.5. Failure to do so could lead to selling pressure which could extend under 111.

Despite today's late day fizzle, I am leaning toward higher prices in the interest rate complex in the coming few sessions but believe that a longer-term top will be made as soon as the end of this week. With that said, we are at a major crossroads. If I am wrong about the near-term direction and support levels fail we could see a substantial move on the downside to 112 in the 30 year bond and 111 in the ten year note.




Treasury Bond Option Trading Recommendations
**There is unlimited risk in naked option selling.

Flat

Treasury Bond and Note Futures Trading Recommendations
**There is unlimited risk in trading futures.

October 23 - Sell a December Five Year Note at 114'22






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.

 

[carleygarner]

October 28th, 2008

Mixed bag ahead of the Fed decision.


Not so confident consumers and continued indecisive trade in equities led to a mixed session in bonds. The 30 year Treasury bond experienced a majority of the volatility and traded within a two handle range.

Weakness in interest rate products can be attributed to strength in equities across the globe. Also, attempts by the Fed to loosen the credit markets seem to be slowly but surely making progress.

However, not so confident consumers provided fuel for the bulls in the face of technically weak trade. A record low reading doesn't bode well for the spending abilities of consumers. The index was reported to be at 38, much lower than the expected 52. If spending follows confidence we may see what was once the buoy of the economy, become the anchor.

The typical chatter leading up to the Fed meetings has seems to have been drowned by excitement in the credit and equity markets. This afternoon, the Fed began a two day meeting to reevaluate the economic and financial conditions of the domestic and global economies. Their decision on monetary policy will be announced on Wednesday, but it is highly anticipated that there will be a rate cut of at least a quarter of a point but a more popular opinion is calling for a half point.

Ironically, after several quarters of deep concern regarding inflation the topic has completely dropped off of the docket. Whether the Fed opts for a quarter point cut or a half point, the Fed Fund target rate will be at its lowest point in more than four years. Keep in mind that monetary policy isn't instant, it often takes six months or more before the economy begins to feel the effects. Likewise, previous rate reductions were diminished due to the reluctance for banks to lend.

While the actual rate cut is all but certain, the market will be dissecting the accompanying commentary for clues as to what we can expect in the next meeting. Most economists agree that the Fed will keep the door open for further cuts.

The Treasury market is at a critical crossroads, making it nearly impossible to pick a direction. If futures can close above named support levels tomorrow, the bias seems to be upward. However, I prefer to wait for clearer signals to recommend trading.



Treasury Bond Option Trading Recommendations
**There is unlimited risk in naked option selling.

Flat

Treasury Bond and Note Futures Trading Recommendations
**There is unlimited risk in trading futures.

October 23 - Sell a December Five Year Note at 114'22
• Cancel this order, we missed this by a few ticks





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.

 

[carleygarner]

October 29th, 2008


All about "da Fed"


FOMC days often make for a long and relatively boring session in the bond pit and today was no exception. The 30 year Treasury futures traded in a relatively tight range pre-announcement. Aside from a quick rally to the 117 area, prices fluctuated between 116 and 116 and a half for much of the session.

The only economic release for traders to digest was the September durable goods data. The number was reported better than expectations and while only slightly in positive territory it was a much better showing than last month's draw of 4.5%. Durable goods orders were slightly bond bearish but traders had their eyes on the Fed's interest rate decision.

Post-Fed announcement, Treasury trade picked up considerably. A 50 basis point cut, and verbal confirmation that the economy will continue to struggle despite measures taken in terms of monetary policy didn't seem to propel the bull camp as one may have assumed. Instead, the seemingly drastic moves by the Fed aroused inflation fears down the road. As a result, the long bond suffered substantial losses by day's end.

The Fed Fund futures are pricing in another quarter point cut by the December meeting, and have even priced in a 20% chance of a 50 basis point cut. If that actually becomes a reality, the overnight rate will be .5%. While this is certainly possible, the market has a way of getting ahead of itself, and this may be a prime example. Accordingly, I like the idea of selling the December Eurodollar at 97.99, which implies a three month interest rate of 2% (this includes the risk free rate plus default risk). It can go higher, but logic tells me that the this is an attractive short.

Treasuries on the other hand, don't seem to be following logic. The bonds and notes are trading at or near key pivot levels making it very difficult to pick a direction. I hate to be "wishy washy" but I am not going to make recommendations or speculations that I don't feel good about.





Treasury Bond Option Trading Recommendations
**There is unlimited risk in naked option selling.

Flat

Treasury Bond and Note Futures Trading Recommendations
**There is unlimited risk in trading futures.

Flat

Euro Dollar Futures Trading Recommendations
**There is unlimited risk in trading futures.

October 29 - Sell 1 December Eurodollar at 97.99





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.

 

[carleygarner]

October 31st, 2008


Bonds "trick and treat"


Treasury traders finally had something to look forward to in Friday session, economic guidance. Skimpy news in recent weeks has lead to trade that is highly dependent on equities. While that was still the case today, the inverse correlation took a temporary break in light of personal income and spending data, the employment cost index, Chicago PMI and the U of Michigan Sentiment.

The day started off on good footing with the long bond climbing well above 115. Helping it along the way, the Chicago PMI was reported nearly 10 points below consensus estimates at 37.8. However, a slightly better than expected consumer sentiment reading and a solid equity recovery seemed to take the wind out of the sails of the bulls.

Insiders were describing the volume as extremely light, and that may explain the precipitous two handle drop from high to low. The move occurred in quick fashion and seemed to be in line with the Halloween spirit. The early morning bull trap tricked the bulls and eventually treated patient bears.

Also adding to the questionable trade through the session, today marked the last trading day in October and likely saw a considerable amount of week and month end position squaring.

We are holding to our target of below 112 in the 30 year Treasury bond. After today's action, the new downside target is 111'17. With that said, things have worsened rather quickly and a temporary bounce can't be ruled out. However, in light of what seem to be higher pointing equities, our objective may be seen as soon as the middle of next week.


Note trade has taken a turn for the worse and should make its way lower to 110'25 based on today's failed rally. Conversely, the 5 year note must close below 113'05 before the bears will have an edge on trading.

If you took our recommendation to sell the December Eurodollar at 97.79, you would have been filled in today's session. Our clients were advised to buy the November 97.75 call for 17 ticks as an insurance policy. Assuming a fill at 97.79 the net risk on this trade is limited to $325 plus commissions and fees. The profit potential is theoretically unlimited!!

Boo!






Treasury Bond Option Trading Recommendations
**There is unlimited risk in naked option selling.

Flat

Treasury Bond and Note Futures Trading Recommendations
**There is unlimited risk in trading futures.

Flat

Eurodollar Futures Trading Recommendations
**There is unlimited risk in trading futures.

October 29 - Sell 1 December Eurodollar at 97.79
• October 31 - Our clients were advised to buy the November 97.75 call for 17 ticks as an insurance policy. Assuming a fill at 97.79 the net risk on this trade is limited to $325 plus commissions and fees. The profit potential is theoretically unlimited!!







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.

 

[carleygarner]

November 3rd, 2008


Quiet start to a new month.


A slow news day, light volume and indecisive equity trade made for a quiet day for bond traders. Despite an overall friendly tone to Treasury trade, I doubt that any upswing will have much lasting power in the near term as supply concerns are weighing heavily on the market. The Fed's continuous efforts to provide capital to the credit system has resulted in massive Treasury auctions and sagging bond prices in the face of healthy demand.

Disappointing ISM manufacturing data sparked a moderate morning rally, but the buying quickly faded as it wasn't much of a surprise. The ISM was reported to be at 38.9, considerably lower than the consensus estimates of 42 and the previous reading of 43.5. The figure is well into contraction territory but oddly didn't attract traders back to the markets. Many players seem to be content with being on the sidelines and will perhaps stay there until much later in the week.

Traders are already looking forward to Friday's employment report. In the meantime, we will be getting data on auto sales, factory orders and worker productivity.

It is highly probably that bond traders will be looking toward the stock market for guidance and Wall Street will be watching the election. Today's boring trade may quickly be a concept of the past as the financial markets have been known to experience large price swings and erratic trade throughout the voting and tallying process.

Keep in mind that based on historical standards, stocks stand to rally the day following a Republican victory and tend to be sluggish following a Democratic win. Treasuries will likely see the inverse.
Without political interference, it seems like fixed income products are leaning lower. However, as mentioned excessive volatility is probable so all trades should be taken with elevated caution. I have adjusted my target in the 30 year bond to 111'24 but am wondering whether last night's move to 112'19 will spark a temporary rally. Nonetheless, I am patiently waiting for sub 112 levels to begin devising a bullish strategy.

The 10 year note has carved a path of least resistance downward, but a bounce to 113'27 may be underway. However, we remain over all bearish barring any interference from the election, or more importantly the stock indices reaction to the event. Once again, caution is warranted.





Treasury Bond Option Trading Recommendations
**There is unlimited risk in naked option selling.

Flat

Treasury Bond and Note Futures Trading Recommendations
**There is unlimited risk in trading futures.

Flat

Eurodollar Futures Trading Recommendations
**There is unlimited risk in trading futures.

October 29 - Sell 1 December Eurodollar at 97.79
• October 31 - Our clients were advised to buy the November 97.75 call for 17 ticks as an insurance policy. Assuming a fill at 97.79 the net risk on this trade is limited to $325 plus commissions and fees. The profit potential is theoretically unlimited!!





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.

 

[carleygarner]

November 5th, 2008

A string of poor economic data fuels rally.


Treasury trade has been ignited by position squaring ahead of this week's event risk as well as a string of disappointing economic data. The result was a four handle rally spanning two trading sessions. The erratic nature of the reversal seems suspect and may not be capable of supporting a long term recovery in bond prices.

After a shockingly weak ISM manufacturing report earlier in the week, the ISM services index was reported this morning to be weaker than expected but manageable. The index was reported at 44.4 despite consensus outlooks for 47 and the prior month's reading at 50.2.

Similarly dismal, the typically inaccurate ADP employment estimates of the U.S. government figures due to be announced later this week were reported at a draw of 157,000 jobs. This was a miss of the expected 100,000 and far worse than last month's reading of 26,000. Nonetheless, analysts are calling for the non-farm payroll data to show a contraction of about 200,000 jobs.

The December 30 year bond endured a volatile but overall friendly trading session. It seems as though path of least resistance will be higher as Friday's employment report approaches. However, bonds and notes are quickly reaching levels in which my trading models are pointing out as significant resistance levels. My first target in the long bond is 118'03 then again near 118'12. Barring an equity meltdown, the market should take a breather at such levels. With that said, the overall seasonal tendency in Treasuries points to choppy yet higher prices going into December. It doesn't pay to be overly bearish during this time of year.

I still like the short side of notes near the mid 116's but caution that there is significant room to move on the upside should equities fail to stabilize. In fact, a weekly chart suggests that 118 may be in the cards. Thus, any bearish trades should be looked at as short term ventures...overstaying your welcome may prove to be painful.

If you took the Five year note trade, I am not recommending stop orders at this time. If you are uncomfortable with the risk, contact me for ideas on protective calls or call spreads.

If you took the Eurodollar recommendation below, be patient. The risk is limited due to the long call option. If you are aggressive, you may consider selling the call on additional strength and holding the short futures. Naturally, this increases the risk along with the profit potential. Contact me for details.






Treasury Bond Option Trading Recommendations
**There is unlimited risk in naked option selling.

Flat

Treasury Bond and Note Futures Trading Recommendations
**There is unlimited risk in trading futures.

November 4 - Sell 1 December Five year note futures at 115'16.

Eurodollar Futures Trading Recommendations
**There is unlimited risk in trading futures.

October 29 - Sell 1 December Eurodollar at 97.79
• October 31 - Our clients were advised to buy the November 97.75 call for 17 ticks as an insurance policy. Assuming a fill at 97.79 the net risk on this trade is limited to $325 plus commissions and fees. The profit potential is theoretically unlimited!!






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.

 

[carleygarner]

November 6th, 2008


U.S. Treasury futures rally in volatile trade.


Profit taking ahead of tomorrow's employment numbers were blamed for an early morning breakdown in pricing. the move occurred despite the an ECB and British central bank rate cut announcement . Insiders noted that big players looked to be taking profits on long positions and heading to the sidelines in search of "better" levels. If they followed their plan, they would have done considerably well. After trading a handle and a half off of its high, the long bond rallied sharply back into positive territory.



The bullish bond factors at work in today's session far surpassed any bid seen in Treasury trade. A dramatically higher greenback, slumping equities and the slough of weak economic data recently released it seems that Treasuries should have enjoyed another day of significant gains.



In the case of the 30 year Treasury bond, today's delayed reaction to equity market turmoil seems to have resulted in a tightly wound coil going into tomorrow morning's employment data. I am sticking to my projection of just above 118 in the coming sessions.



In previous reports I have noted significant resistance in the 10 year note at and above 116. Thursday's high of 115'31 confirms reluctance of trade to surpass noted resistance levels. Nonetheless, I believe that we will soon test resistance near 116'15.



I haven't given up on the downside potential in the 5 year note, but short traders should be willing to accept the risk of a rally to about 116'15. Likewise, if you are short the Eurodollar as noted below, we are approaching extremely low yields and overbought pricing. I am thankful for the call option which is offsetting most of the loss, but hopeful that things will turn around in a quick fashion. You may want to consider adding on to this position!







Treasury Bond Option Trading Recommendations
**There is unlimited risk in naked option selling.



Flat



Treasury Bond and Note Futures Trading Recommendations
**There is unlimited risk in trading futures.



November 4 - Sell 1 December Five year note futures at 115'16.



Eurodollar Futures Trading Recommendations
**There is unlimited risk in trading futures.



October 29 - Sell 1 December Eurodollar at 97.79

· October 31 - Our clients were advised to buy the November 97.75 call for 17 ticks as an insurance policy. Assuming a fill at 97.79 the net risk on this trade is limited to $325 plus commissions and fees. The profit potential is theoretically unlimited!!








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.