July 27th, 2009

“I’m not even kissing up when I say it’s about the best book on option trading I’ve read.” ~ Aaron James, Eastside Financial Group in regards to “Commodity Options” now available through all major book outlets

Treasuries bogged down by supply

Better than expected housing starts combined with record debt supply kept Treasuries under pressure.  Yields on the benchmark 10-year note rose to their highest level in about a month.

The U.S. Treasury is slated to auction $115 billion in notes this week. The first on deck was this afternoon’s reopen of the 20-year TIPS which saw a 2.5% yield on a bid to cover of 1.92 and a 54% indirect bidder take in the last offering.  Today’s serving of 20-year TIPs was in the amount of $6 billion and was met with a healthy amount of demand.  The  bid to cover came in at 2.27 but the indirect bidders only accounted for 47.8% of the action.  Keep in mind that indirect bidders are mostly assumed to be foreign; while demand from overseas was healthy it was a little less than what we have been seeing.

On Tuesday, investors are expecting the sale of $42 billion in 2-year notes, $39 billion in 5-year notes on Wednesday and $28 billion in 7-year notes of Thursday.  Many analysts are weary of the ability of bonds and notes to quickly recover from such a massive amount of supply regardless of what the chart may suggest.

We feel as though supply concerns, although dominating trade, are built into pricing but it is up to equities to give life to bonds and notes.  Without a stock market correction, it will be difficult for Treasuries to find buyers.

Weakness in the buck is also working against Treasuries.  It seems as though the dollar index may be headed toward a test of support near 77.  If this is true, the currency market could temporarily bring bonds and notes lower in the near-term but we feel like intermediate-term prospects are favorable.

Also putting pressure on interest rate products, new home sales came in much higher than analyst estimates at 384k; the previous reading was 346k and expectations were for about 350k.  However, some analysts point out that despite higher sales, prices continue to weaken.  This suggests that sales are the product of discounting as opposed to a strengthening market.

We continue to be relatively neutral in the near term but feel like there could be a great buying opportunity at lower prices.  Nonetheless, we see support just under 115 in the long bond and again near 113′20.  Resistance should be found near 116′14 and again at 118′04.  On our most recent newsletter, we noted support in the 10-year note near 115′15 and this continues to be the case.  However, we cannot rule out a move to just under 115 before a reversal can occur.

* 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 be factored into current prices, any references to such does not indicate future market action.

Treasury Bond and Note Option Trading Recommendations

**There is unlimited risk in naked option selling.

July 20 – We recommended to sell the August 109 puts for about 23 ticks

• July 21 – We recommended to buy back the August 109’s for about 8 ticks, a fill at 9 was possible today.

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.

June 29 – Our clients were recommended to sell September Eurodollar futures while buying a 9937.5 call as insurance.  The calls were getting filled near 7 ticks, and the futures near 9933.  This makes the total risk on the trade at expiration $287.50 before commissions and fees.

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Carley Garner
Senior Analyst / Commodity Broker
DeCarley Trading
cgarner@DeCarleyTrading.com
1-866-790-TRADE
Local : 702-947-0701

www.CarleyGarnerTrading.com
www.DeCarleyTrading.com

*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.