Treasuries in Freefall in Light Volume

A resilient stock market, a stronger dollar and decent economic data has put pressure on bond and notes. In this newsletter we have mentioned seasonal strength and vowed to be bulls on dips but we have to admit that we were a little surprised by the strength of the selling pressure. However, we acknowledge that holiday volume might have had something to do with last week’s plunge. Additionally, we have not completely given up on a rally.
The 30-year Treasury bond reached a yield in early trade near 4.72% and the note found itself near 3.85%, much higher than that of a few short weeks ago.
The primary news event of the day was a 2-year note auction that resulted in mixed results. The bid to cover was 2.91 which was in line with expectations but the indirect bidder action was the lowest seen since July. From here, traders are looking forward to the auctions of longer maturities over the next few sessions. However, due to the fact that there aren’t expected to be active participation due to the holidays, traders might be willing to cut the complex some slack.
The recent rise in Treasury yields expresses the market’s acceptance of economic stabilization. While it would take a yield in the bench-mark 10-year note near 5% to represent a “normal” scenario, the market has made strides toward optimism. The question remains whether; what have witnessed in the previous few weeks is simply a blip in an otherwise bull market or if the tides have turned. We are stubbornly holding on to a buy on dips mentality and if there has ever been a dip in Treasuries, this is it. The long bond futures have dropped about 8 handles from the November highs with little in the way of a corrective bounce.
If you recall, in our last newsletter dated December 17th, we had mentioned that we were expecting a bounce in the 30-year bond futures to the 120 area at which point we would become neutral. We now know that we had the right idea, but were a little short on our prediction. After reaching a high of 119’09 the market reversed and hasn’t looked back since. Given the lack of volume and the undeniable momentum it seems as though lower prices will be seen before serious buyers come in. We are looking for the March bond futures to see mid-114ish before finding meaningful support.
Similarly, the 10-year note never reached our mid-118 area (but it got close) and has since reversed sharply. For now, we feel as though notes will hold support in the mid-to-low 115 area.
Our clients were recommended to sell the March bond 110 puts for 23 or more last week, and are currently under water on the position. However, we still like the trade overall and might be inclined to add on at better prices for those that have ample margin available.
Treasury Bond and Note Option Trading Recommendations
**There is unlimited risk in naked option selling.
December 28 – Our clients were recommended to sell the March Bond 110 puts for 23 or better.
December 10 – Our clients were recommended to sell the Feb bond 113 puts for 24.
· December 11 – Clients with available margin and willingness to accept more risk were advised to add on to this position by selling the Feb 113 puts at 34 or better. A handful were filled at this price, many went unable.
· December 17 – Our clients were advised to take profits today on the rally. Fills were coming back at 9 and 10 ticks, so assuming an entry price of 24 and exit of 9 the trade was profitable by about $235 per contract before commissions and fees.
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.


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