May 18th, 2009

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Feb buying goes unnoticed

The Federal Reserve stepped in to buy Treasuries in the 10 to 23 year range totaling about $3.18 billion but traders were focused on stocks.  The Fed is expected to be back on the "buy side" on Wednesday and Thursday.  While this may not be enough to turn the tide, it could keep a floor under pricing.  Keep in mind that much of the recent short covering rally (resulting in sharply lower yields) is said to be attributed to anticipation that the Fed would increase the pace at which it is acquiring its own securities, but failure for this to materialize has eliminated the  bullish sentiment.

The selling pressure came on light volume, but you had probably already assumed this.  It is highly likely that traders will extend the already long Memorial Day weekend into a mini-vacation.  The major news event slated for this week appears to be the release of the FOMC minutes on Wednesday afternoon.  My guess is that come Thursday, there will be even less volume flowing through the Treasury markets. 

The theory that housing stability is necessary for an economic recovery has kept housing data in the spotlight.  Today the U.S. Department of Commerce announced that building permits and housing starts were in line with, or better than analyst estimates and better yet have made moderate improvements from last month.  In similar news, the NAHB (National Association of Home Builders) Index portrayed a slight increase in homebuilder sentiment.  The index moved from 14 in May to 16 in April. 

As mentioned in Friday's report, we are leaning lower in Treasuries and looking for an eventual retest of the recent lows and possibly slightly beyond.  We think that the T-bond could see 119'08 and maybe even the mid'118's before finding buyers.  Note traders should look for support near 119'11 and again at 119.  The first area of support for the 5-year note futures looks to be near 116'21 with 116'01 being significant support.

* 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.

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

May 7th - Sell the June 117 puts for 25 or better

·         May 11 - This trade was exited near 10 to 12 ticks to take a quick profit

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.

April 30 - Our clients were recommended to sell the June Eurodollar near 98.045

·         If you are uncomfortable with the possibility of a retest of the January highs, you can buy a June 99.00 call for about 13 tick to limit your risk on the trade to about $212 before transaction costs

·         Keep in mind that this market isn't far from its all time high, if you are comfortable being short and are properly capitalized you may want to consider adding on if we see a sharp rally.

*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.