T-Bond trading comment (November 30, 2007)

The week is almost over and the close is not the most bullish as seen in the above graph. We have formed a nice hammer and according to chartists this is a bearish signal rooting for a change of direction. This would nicely cap-off the current run and would enable us to see lower prices...

Today was quite interesting. After initially trading higher, which enabled us to unload our long at 118-04 (we were lucky), the market went crashing down as equities posted another strong performance all across the board on probabilities that the Fed will cut rates and other central banks will follow suit. In a little less than an hour, the market lost a complete dollar before regaining a bit. Sadly, we missed that opportunity. At least our options are the right way... Afterwards, the market whipsawed between116-29 and the 117-10 zone enabling us to nibble on each side of the market. Liquidty was rather scarce today as it was year end for several US-dealers.

Next week, is a new month and the last of the year. The week will climax with the job reports on Friday... The market is expecting a softer number after two strong numbers.

T-Bond trading comment (November 29, 2007)

After a little calm, the T-Bond has restarted its forward march, RSI is back at more reasonable levels andelasticity is ok, thus leaving room for higher prices. But if we look at a weekly chart, the picture might not be that bullish... Depending on tomorrow's close, we might be forming a reverse hammer. If the market closes in the low 117s, we would have a nice candle picture which could signal a reversal of the latest trend... Just to remind ourselves, this is what signaled the present bullish run we started at the end of June 07.

All that said, today was an interesting day with clear trends almost all day long. The 117-20 level offered some good support while the 118-06 zone provided us with a resistance. All in all, the market climbed by almost a full dollar today. This move was not a complete surprise with the continued widening of the LIBOR levels, the weak equities overnight in Europe and the month end buying indexers that have to re-adjust their portfolio duration to the upside. Another signal was also, yesterday's monter move in the equities that was not followed by the bond market. They only went causiously down, letting us know that if the equities showed any weakness', they would shoot up and that is what happenned today...

Our daily momentum turned long at the settle. Now we need a 118-05 print to be happy... We might see it on any weakness tomorrow as more people jump in the month-end band-wagon. Tomorrow we have PCE data as well as CPM.

T-Bond trading comment (November 27, 2007)

Reversal day! After yesterday's run-up, today we saw some nice distribution. At one point the market was loosing alsmot 2 bucks... Talk about crazy days.... The short we put in place yesterday at the settlement was taken off during the night as the T-bond went crashing down, before picking-up ground for our open. From there on, the market essentially monitored what happened in the credit and equity market for the rest of the day...

If you think that the market is too high and don't want to risk too much money, an interesting play is to buy put spreads... This morning at one point, the 117-116 put spread for march was trading around 22/64... This is almost some 3 to 1 profit ratio...

That is it for tonight. Short message, no time for more

T-Bond trading comment (November 26, 2007)

I have nothing to say except that we are in panick mode. The market in my opnion is a bit ahead of himself... But hey who am I to decide when the T-bond is high enough...

The whole day was bid, bid, bid... Our daily elasticity gave us the go ahead to short the market at the settlement... Now we need to see a 118-9 print to be happy. Our short call are getting whamed... Granted we still have protection room but the MTM is not friendly right now ( vega and prices higher)

I don't want to appear too bearish on the future direction of the T-bond, but today's run-up was mainly done while the stocks where only midly down (got killed after the settle although) and swap spreads were also loosing ground... Weird...

Economic Focus: Week of Nov. 26, 2007

The market is going to focus on three items this week. First, Thanksgiving shopping data supposed to come out on Monday. Experts are expecting relatively strong numbers. Secondly, GDP data on Thursday. Is the economy still growing at a good pace? The advance number for Q3 showed a strong number on Oct. 31st. Finally, as the market has done in the last couple of months, it is going to focus on more credit related stories .

In addition to that, several numbers are due on the housing sector for the last three days of the week, but it is very doubtfull they will shed more light into the problem...

Week-end thinkering! Can we go higher?

Looking at the above chart, we can see that on a historical basis the market seems to be overextended, but the last time we moved by that much in such a period were crisis times... The last three years where we had these kind of moves were 2000, 1997 and 1990 (the last two are not shown on the above graph). Each time we were in the middle of a crisis: Tech bubble imploding, Russian/Asia/LTCM and recession in the US...

So yes we can go higher even if the market is overextended right now... Although the recent move maybe needs a small correction before going higher

T-Bond trading comment (November 21, 2007)

Bulls are on steroids with what continues to happen in the credit market. In fact the market seems to be panicking a bit (as seen in Europe where the players in the Covered Bond market decided to completly stop market making activities so as to stop the blood shed since bids are non-existent). Another days brings another trolley of bad news and the market just keeps going up in sympathy with the problems despite the fact that it should maybe relax a bit.

We arrived this morning, with the market almost up a buck overnight on rumours that ACA and SCA might be downgraded and that ACA was even considering Chapter 11. If these two bond insurers are effectively downgraded, this has major implications for the bond market. In addition to that, we also had more rumours coming out of the UK on funding problems for several banks as well as massive capital injections... To top this off, we were just in front of a very long week-end (even if the market is open Friday morning) and with the kind of newsflow we have right now, the only news we can have until next Monday will be bond supportive... Oh yes I just forgot, equities got hammered, again, we have now erased all of 2007 profits and I think that we might be headed for much lower prices even if there is a nice support at 1411 in the S&P500 futures to be tested first.

Today's trading was well supported at yesterday's resistance of 116-14. In fact, since 3:00 AM in the morning we bounced on it for a total of 4 times. The upside was somewhere near the 117 line, but the market seems to be completely driven by the credit news and when there is no news, the market simply stays put... In the past month and a "quarter", the market has now rallied almost 7 dollars and this is after a previous rally of around 6 dollars over the summer. How much higher can the market go ? Obviously, with the actual context, it can go much higher but the January 122 calls (exp. Dec 21st) looks attractive at 11/64. There is 29 days left before expiration and we are still 5 bucks away from the strike... So this means the market needs to rally by 12 dollars in total since mid-October before the short sell get in hot waters. Not impossible, but unlikely...

This week's Friday is known has the Black Friday and is the most important shopping day in the whole year. The market will be eager to see the retailers numbers as fast as possible since they usually give a good pointer as to where the Q4 GDP will come out, how the employment will be affected as well as retail sales. Estimates are pointing for a strong number...

T-Bond trading comment (November 20, 2007)

Are the bulls loosing breath ? We bounced all day round between 115-28 and 116-14 and closed at the low end of the range... Not the most bullish especially since the T-Bond is overbought, the FOMC was more or less bullish for the economy and the 116-14 level has been a resistance level in the last hours and is also a longer term resistance we had 2 years ago.

We opened the market, on the bullish side this morning after creating the low overnight on strong european equities. As the stock market opened on the strong side, the long bond scaled back from the 116-14 level. After reaching again the lows of the day, we had the Countrywide rumour... Apparently, CFC was to file for bankruptcy, but the stocks was trading a 9.8 when we heard it and in general a company on the verge of Chapter 11 is not trading at 10 bucks.... Any how, the market went back up as we waited for the Minutes. They where kind of mixed, but overall they were kind of bullish.... Afterward, the market just slowly drifted down to close at the 116 mark.

Option expiration was today and we finally took off our option strategy... Definitely not the best month... In fact the worst month in a while. The only good thing is, as the market was falling we did not cover the delta right away and were able to recoup 23% of the loss... Otherwise not a super day, with the whipsawing, trend followers got hurt and our momentum models on EDs didn't give the right direction.... Better chance next time!

T-Bond trading comment (November 19, 2007)

The week ahead

Another short week ahead! In total we only have 3 trading days this week, but realistically the market stop Wednesday at noon.

Accordingly to this shortened week, the economic calendar will be light. The highlight will take place Tuesday afternoon with the release of the FOMC Minutes. In addition to that we have housing starts Tuesday morning and leading indicators Wednesday morning.

Tuesday will also so be expiration day for options on T-bonds, so our option strategy will come to an end. For a second consecutive month the strategy is not doing very well. The strategy is only points away of flat trading... but there is still two days ahead.

T-Bond trading comment (November 16, 2007)

New high again today but rather weak close for the week-end. Altough after yesterday's monster move, today's consolidation was to be expected...

Arrived this morning at the office after challenging lower and higher prices that would proove to be the resistance and support level for the rest of the day. As people arrived at their desk, the market was getting challenged as stock futures were climbing. This lasted until the stock market opened and started to loose ground. From there on, we developped a nice upward trend that nicely topped near the high we created early that morning. We spent the rest of the day oscillating around yesterday's close climbing to 115-17 for the close as equities were being hit. In the afterhour session, the T-bond lost again some ground as equities shot higher to close with a 0.5% profit for the day.

The market is still fearing for more bad news to come, as we saw some fresh steepners being put on 20 minutes before the pit session close. The T-note was gaining 4.5 ticks while the T-bond was only up 4 ticks. Normally the long bond should have been up by at least 6-7 ticks.

Yesterday, we said that we were entering into a new configuration that enable us to see much higher prices... We still stand by this scenario, but it is important to bear in mind that in Europe, the Bund is still not able to make new highs and is still stuck under the 115 line. At one point, the bulls will run out of time, so the sooneer, the better.

Our option strategy is expiring Tuesday afternoon. Right now the strategy is a little in the red... To flat trade we need the T-bond to close at 115-7 so let's hope for lower prices in the next two trading days. As for our daily momentum, that showed the green light at 3 o'clock yesterday we had a better day than what we were expecting with a close at 115-17.

T-Bond trading comment (November 15, 2007)

New high! We broke through 2 years old highs by closing at 115-12. This was realized on the back of weak equities and heightened risk of more problems in the financial industry. These are fancy reasons to say that the real answer is simply that the market is really bullish and the market is bid. This was plainly evident during the day when equities had not yet crapped out and were simply oscillating around the zero line while bonds were going higher and higher.

We arrived this morning at the office, with some passably bad news from the UK ( more banks, more in troubles). After testing yesterday afternoon's support at 114-08 early in the night, we started to climb back higher and even had a start to 115 line. This was a good point to sell the market, but only the first time... The second one was less fun... Especially since we went through it like a bullet... In any case, we are now developping a new scenario. By entering these waters, we are opening the door for much higher prices since we switch on the double bottom scenario (see The month ahead: September 2007) with a terminal target of around 123... For now the first target is 116-10 then 118-10. We could see these levels, if the credit related crisis goes on.

Our option strategy is now starting to bleed since it is naked at 115... Funny thing that 2007 would prove to be so trendy after the last three years much more choppy... In any case there is three days left so it can still go down! Also our daily momentum strategy clicked the green light at the close for higher prices tomorrow... Our conviction level is not huge on the trade after today's monster move, but we entered it at 114-11... No point in developping models if you are not going to follow them eh?

T-Bond trading comment (November 14, 2007)

The week Ahead

Short week ahead for fixed income players as the market was closed today.

We closed last week at the top of the market for 2007 and near 2006 tops... The question is will we break convincingly to the upside or remain in the large trading range between 105 and 115? Economic data roots for lower prices with relatively strong consumption and strong employment numbers but we are in the middle of a financial crisis and bad news just keep pouring in (today was the turn of e-trade).

This week's economic datas are Inflation numbers (Wednesday and Thursday), Retail Sales (Wednesday) and Empire State Mfg and Phily Fed surveys (Thursday)

T-Bond trading comment (November 9, 2007)

Okay, we have busted through the 114-00/05 and we are now closing in on the
115 level. Last time we visited these lofty levels was in December 06. In fact, the 115 vicinity has been the top side boundary for 2006 trading range. The 115 level has been a major resistance for the past two years.

Will it hold again this time ? Time will tell. One thing that's sure, is that it won't be the market elasticity that will bring back the T-bond lower as it did in December 06. Our elasticity model is calmly in the middle of its range giving no indication of an over-extension.

We arrived this morning with again the same pattern we have seen in the last few days. Run-up in the prices overnight, until 7h00 AM and then the start of a selling wave that usually bring us back in the mid 113-20s. But this time it was different. With half day trading and the perspective of a long week-end, market participants covered their shorts in the long end.
This up-move was not due solely to covering of directional position. Today, was also the first day that we did not see or hear massive steepners being put on, in fact curves even came back a bit and so gave some breathing room to bullish intentions on the long bond. In terms of trading, our amputed iron butterfly is getting closer to hot waters since he is naked at 115, but our momentum and intraday directional models had an honest day.

So what is up for the end of the month ? Can the T-Bond go much higher ? Well the easy answer is yes, especially given the actual context of financial crisis. But if we approach this question from a statistical point of view, we would tend to say no. Looking at the behaviour of the T-Bond during the month of November over the last 30 years or so (the graph only shows the last ten years), and we see that the long bond rallies no more than 2.25 dollars durring these 30 days 80% of the time. Now the question is, by how much did the T-bond rally during the first nine days ? The answer is a bit over two bucks, thus leaving only a slim potential for higher prices. Finally, as we mentionned in the first paragraph, the 115 level has also been as resistance area since the end of 2005.

T-Bond trading comment (November 8, 2007)

Days pass by and the market remains the same. Bearish intentions in the morning quashed by bad credit/losses/downgrade/liquidity/... news during the rest of the day. Today was no different than the rest of the trading week as we closed still hovering near the 114-00 yard line. The market seems to have bearish intentions but the actual financial crisis keeps prices-up as no one seems to be willing to sell the market.

The market opened on the strong side overnight challenging the 114s, as european equities were susbtancially lower. The Bund made a gap at the open but subsequently filled it, fuelling bearish convictions. This lasted until 9h40, just before Bernanke. In the mean time, scalping on each side of the market was profitable but not trend following. About then, the market started to climb as bad news started to hit the screens at the same time that Bernanke was reiterating the Fed's view for sluggish growth in the next 2-3 quarters and continued problems in the financial markets. Nothing new there but it had the expected impact. Stocks tumbling down, bonds higher and curves steeper! In late trading, we subsequently retraced or moves to the downside leaving the T-bond about unchanged.

What to expect for the next few days? The market looks like we are due for lower prices over the next two weeks but the short term will be controlled by the amount of bad news that continue to fill the screens... Also, from a graphical point of view, we aren't able to make new highs but our lows are higher and higher... Tomorrow is half day with no work on Monday. We have trade balance, import prices and U of Michigan.

One last thing, our daily momentum model is showing the green light to be long for tomorrow, but tomorrow is a half day... So could be weird... The lights turned green yesterday for eurodollars futures...

T-Bond trading comment (November 7, 2007)

Another day passes and we are still under the 114 level even after an unsuccesful try to the upside early this morning on more credit news... We are about flat over the day but this is only due to some steepning trades being put in place. If it was not of that, the T-bond would be much higher as are the 10 and 5 years notes. The T-Note closed on the top side of its daily range while the T-bond just bounced off its lows and slowly drifted higher but with a good lag.

For the last few days, we have been consistently bouncing off the 113-13/16 area. This would tend to indicate that this is becoming a new support level that would favor higher prices... Options are also showing more potential to the upside. This view can be easily explained by the fact that given the current context, people tend to prefer longs against shorts and will therefore be unwilling to sell in the wind even if long targets are reached. Talking about targets, the bund has bumped again, against the low 114s... It will be interesting to follow its pattern.

Stocks and news were definitely bearish with stocks getting hammered (Dow Jones down -2.64%). The only piece of news reaching ours ears were either about losses, writedowns or weak capital ratios... Not good. Also, we had several Fed speakers that were not exactly bullish...

Tomorrow, we have 30 years auction which could put a bit of pressure on the long bonds in the morning. Also on the economic front we have Claims and Bernanke testifying about the US economic outlook...

T-Bond trading comment (November 6, 2007)

For now the 114-00/05 resistance holds thanks to advancing stocks and tomorrow's 10 years auction. We arrived this morning with some choppy trading to the downside that offered plenty of opportunity for some scalping as we were bouncing from the bid to the offer all the time. The only time of the day where we had a bull run was just before Morgan Stanley announced new writedowns. This was the perfect moment to short more bonds, as recent history showed us that it was profitable to do that(eg: look at last week...). The rest of the day was on a downward slope as we went back to reach the 113-18 zone.

Does this means that the bull run is done and we are starting a new bear leg? Well no, not exactly, with the recent run to the upside, we could very well be in consolidation still... To confirm a bear leg we would need to break the 113. Just worth of mentionning, the Bund did not succeed to advance today despite rather supportive economic data. So...

Fresh beer is waiting for me.... So more tomorrow.

T-Bond trading comment (November 5, 2007)

I am back from holidays and the market is radically in another configuration than when I left! When I left for holidays, the market was firmly in a bearish move and we were trying to break the intermediate resistance standing near the 110 level. In the end, we did a nice little double bottom configuration and went back-up on the back of the return of the liquidity crisis.


Now the interesting question is where are we going ? The conscensus we are hearing on the street is that we should see higher prices before lower prices, but to confirm that we have to overstep in a convincingly way the114-00/05 level that has hold (minus a few overpass) since December 06. Granted, Friday we went to see much higher prices on the back of bad news in the banking industry ( Merrill's CEO out, Citigroup's CEO most probably out and a score of huge write downs by lots of banks in their fixed income books), but after testing higher prices this morning we went straight back toward the 114 level. This week will be interesting to look at, because there is no big economic news on the radar so the market will be able to develop its own story. If we do not overpass the 114 level significantly, we could see the 112 level as a first target and 110 after. It will be especially interesting to look at the T-bond's move since the Bund in Europe is closing on upside targets.


Did not look to much at the trading session today as I was touching back with the market.... Satisfied myself with some small scalping in the T-Notes and T-bonds.