Bond Futures rip higher, but will RIP be next?

It has been a chaotic and confusing week for commodity traders, but the Treasury market seemed to avoid the typical spillover of volatility. Virtual crashes in silver, gold, crude oil and the Euro could have easily sparked flight to quality buying into Treasuries but it just wasn’t meant to be.
The government reported its latest data on the jobs front this morning to an eager trading community. The U.S. economy gained 244,000 jobs last week to beat expectations of 185,000. Following yesterday’s tragic weekly jobless claims, the news was probably viewed as being better than it actually was.
The recent plunge in commodities “should” have put some pressure on bonds and notes given the inflationary implications. Similarly, we were expecting the inevitable reversal in the U.S. Dollar to work against asset prices of all types, including Treasuries…and thus far that hasn’t been the case.
There are clearly less obvious factors at work; specifically, Treasury seasonals are relatively supportive to bullish. This is because the proceeds from stock investors that “sell in May and go away” tend to allocate the newly liquid funds into bonds.
The chart tells us a different story; most technicians would probably agree the market is a little overheated and due for a pullback. Current pricing is well above the March “panic” high but this time a majority of the buying seems to be at the hands of liquidation by the shorts. We have been pointing out large net short positions in notes among both large and small speculators. Unfortunately, small specs tend to be position in the wrong direction and are often undercapitalized. It is our guess that this is the primary factor in the latest rally. Accordingly, we can’t help but feel a bit bearish up here.
If we are right, a corrective move in the June 30-year bond could see the mid-121’s and the note might slide to the mid 120’s.
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may6note11.png* 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.
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
cgarner@DeCarleyTrading.com
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*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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