March Treasury Bonds are down 2/32 at 120:28 this morning as I write. The included chart shows that the bonds broke out over a small consolidation range yesterday suggesting that the bonds want to test towards the early October highs in the 123:00 area. People wonder how the treasuries can be so strong in the face of all the treasury security supply that is coming to the market. Who is buying all this paper? Yesterday, there was a 5 year treasury note auction of a record amount of $42 Billion worth. This auction was oversubscribed by almost three times! There were bids of over $118 billion worth trying to buy only $42 billion in 5 year notes. Clearly there is great demand for US Treasury securities. There are many possible reasons for this demand. One possible reason is that many institutions including banks, may have taken profits on large stock market gains and want to stand aside until the end of the year, but still need to park their cash somewhere. Since money market funds are paying virtually zero, then the alternative is US treasury securities. Another reason could be that some large institutions may have the ability to borrow from the Fed at virtually zero and can then invest those funds into treasury securities for an instant arbitrage gain in yield. Foreigners may have nothing to do with this rally in bonds at all.
The chart says that the trend is up and a test of the October highs is very possible. The directional movement indicators are bullish but not by much. The ADX line is still edging lower suggesting that this is a reluctant uptrend with not much momentum yet. I am currently looking for a good ratio call spread to put on, but so far, I can’t find one that makes any sense. I may put out a recommendation later if I can work out a bullish trade. Stay tuned.
Yesterday, I put out a special report to liquidate the covered put spread. Here are the results of the overall trade since it was first entered.
The original trade was selling one March Treasury Bond futures contract at 117:00 and selling one March T-Bond (117 strike) put option at 3 15/64 back on November 6th.
On November 17th, we rolled the short 117 put up to the 121 put. The gross profit we made on the short 117 put trade was $1515.63.
Then yesterday, as the bonds broke out to the upside, we liquidate both the futures contract for a loss of $3906.25 gross and bought back the short 121 put for a gain of $703.13 gross.
So the overall results of this losing trade was +$1515.63-$3906.25+703.13 = -$1687.49. Sometimes we have to take losses to avoid bigger problems, once we recognized that we were on the wrong side of this trend. My motto is that we can always get back in. We still own some ratio put spreads down below just in case the bonds turn over again.
Followers should also be long one March Bond (114:00 strike) put from 2 12/64 and short 2 March Bond (110:00 strike) put options from 1 9/64 each for an overall credit of 6/64 or $93.75 gross.
You should also be long one March Bond (108:00 strike) put option from 52/64 and short 2 March Bond (105:00 strike) put options from 29/64 each or an overall credit of 6/64 or $93.75 gross.
March options expire in 86 days.
David Hall
The information and opinions contained herein comes from sources believed to be reliable, but are not guaranteed as to accuracy or completeness. The risk of loss in trading futures and/or options can be substantial. Each investor must consider whether this is a suitable investment. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative of future results.
This newsletter is not intended for dissemination to the public without prior approval from David Hall.
