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.