July 14th, 2011
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One more rally in bonds before rolling, or are the highs in?
It was a relatively exciting day on the economic front, and action in Washington D.C. wasn’t far behind. Early this morning traders were fed several pieces of economic data; including PPI, initial claims, retail sales and business inventories. Later in the day, it was Chairman Bernanke’s semi-annual Senate Banking Committee testimony, and then a 30-year bond auction.
Initial claims were reported at a better than expected 405,000 (the prior was 418,000). Over 400,000 claims for unemployment is a horrible number in regards to historical standards but in this new world of stagnant growth, it was a pleasant surprise. Retail sales also beat estimates by coming in at rate at +.1% while most were looking for a draw. Most importantly, the inflation at the producer level (PPI) was reported to be a down tick of .4% but the core number was a positive .3%. All in all, the news was overall bearish for Treasuries and by the end of the trading session it was displayed in pricing.
The Treasury auctioned $13 billion in reopened 30-year bonds at a rate of 4.198% and a strong 2.8 bid to cover. With demand like that it is clear that investors aren’t concerned over a possible debt ceiling issue in which a coupon default would occur. Most agree the likely resolution will be a last second buzzer beater extension…but hopefully this time there will be some sort of agreement to cut the budget deficit going forward.
On another note, Ben Bernanke scaled back his QE3 talk during a D.C. testimony. Yesterday, metals and currency traders began pricing in another round of Fed money printing after the Fed chair suggested that there could be more stimulus. Apparently they mistook “could” for “would”. Ironically, the metals didn’t really take back the price moves. Nonetheless, a small probability of QE3 doesn’t give traders a reason to buy Treasuries but it should encourage the bears to avoid becoming overly excited by any down moves.
Today’s selling (and the fact that we are headed into counter-trend Friday) makes us second guess our expectations for another run at new highs before a reversal can occur. We will cautiously look for such a move simply because chasing a (relatively) quiet market lower tends to be difficult.
The best trade is likely from the short side. Look for resistance near 127ish…Should the market see short squeezing, there are surely stops to run above the old highs and this could put the September contract into the mid to high 128′s. A similar move would mean just under 126 for the September 10-year note. In the meantime, look for daily support near 125’03 and 123’23 in the note.
* 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.
**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.
Flat
In other markets….
July 11 – Clients were recommended to sell the August Euro 132 puts for about 28 ticks in premium, or $350.
July 12 – Clients were recommended to sell the August Yen 129.50 call for about 28 ticks ($350).
July 12 – Clients were recommended to sell the August Gold 1610 call for about $500 but some fills came back much higher (in excess of 8.00) following late day spike.
(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)
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