Bonds and Notes Defy Gravity

We have said in previous newsletters that Treasuries tend to rally during November and much of December regardless of fundamentals and that seems to be the only factor keeping bonds and notes above water. On a day in which fundamentals seemed to be decisively bearish in long-term interest rates, the market held its own.
All of the inter-market relationships that traders tend to rely on for guidance have all but vanished into pixie dust. Dramatically higher equities in recent days might have had something to do with the lack of upward momentum but it clearly hasn’t triggered the aggressive selling that one might have expected. Similarly, the weak dollar should be a bit more of a drag on Treasuries than it seems to have been as of late.
Although the CPI and the PPI have shown signs of inflation, the commodity markets are flying high. Many of them are trading near multi-month, or even year, highs. In fact, one of the most widely tracked commodities, gold, is trading near an all-time high and seems to be propelled solely by expectations of inflation; yet Treasuries have failed to budge.
Other than the other financial and commodity markets moving, there was little news for the bond market to digest. However, there was a 3-year note auction which was absorbed relatively well. The U.S. government issued $40 billion in 3-year notes at a rate of about 1.4% to a 3.33 bid to cover and an indirect take of 68.5%. The market still maintains a healthy appetite for the Treasuries risk averse, light yield securities.
Perhaps some of the lack of direction has to do with the auctions on tap. The market is said to be expecting a little less demand for the record $25 billion in 10-year notes on deck for tomorrow and the $16 billion in 30-year bonds on Wednesday.
We have been patiently awaiting better levels to be a bull, preferably a bit under 117 (maybe even closer to 116) in the long bond but the opportunity has failed to materialize. We aren’t comfortable buying into such quiet markets with either futures or options because the one thing that I have learned is that quiet markets don’t stay that way for long.
I prefer waiting for something better, but if you have to be in the markets…the best play might be a long strangle using (cheap) out of the money puts and calls. For instance, you can buy the December 121/116 strangle for about $400.
Support in the 30 year bond lies in the mid-117’s then again at 116’30…there is some chance of a temporary, yet swift, slide closer to the 116 area. If this happens, it should be a great place to be a bull.
Treasury Bond and Note Option Trading Recommendations
**There is unlimited risk in naked option selling.
October 15 – Yesterday afternoon, our clients were advised to sell puts against a possible Thursday plunge. We recommended to sell the December T-bond 112 and 113 puts for 20 and 26 ticks respectively, or about $312 and $406 before commissions and fees.
October 20 – Our clients were recommended to exit the 112 puts near 6 ticks and the 113 puts near 8. Fills on the 113 puts were coming in at 9, we recommended to make the 6 tick buyback on the 112’s GTC. Those that still have a short 113 put open, we recommend a GTC order to buy it back at 9 or 10.
· These orders have all been filled, you should be out of this trade.
Treasury Bond and Note Futures Trading Recommendations
**There is unlimited risk in trading futures.
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.