12/08/2007

T-Bond trading comment (December 7, 2007)


Well in the end the reverse hammer we saw last Friday ona weekly chart proved to be right for this week as we have sank by two bucks since then and almost three since the top seen on Tuesday. Is there more room to the downside? There is always room for lower prices when you are in the 115s but maybe the recent drop has been rather too abrupt... In fact it has been so abrupt that our elasticity models that were in the higher bands are now nearing the oversold thresholds on the long bonds... In addition to the abruptness of the drop, we also have to take into account the 115 line on which we bumped today... This line has been a major haggling area for the last few years as shown on the above graph (the big fat purple line).

Today was a nice downward, no surprise day. We opened and started to go lower and basically just kept going down all day long. This downmove was spurred by several factors. First, we had the Paulson's subprime rescue plan and secondly we had the quite strong NFP. Granted the trend is downward on the NFP, but there is hope. Such a number must have calmed a lot of people on the street as it gives us reassurance that the consumers will continue to consume as they have a job and thus money flowing into their bank accounts... So for now, everything is good...

Next week, everybody will be looking at the Fed on Tuesday... According to the Euro-dollars, the market is widely expecting a 25 bps rate cut... This is less agressive than earlier this week when the market was giving a 50-50 probability for 25 or 50 bps rate cut... There is still a fair amount of people in the market that thinks that the Fed should maybe do more than less and cut by 50 bps given the actual poor financial conditions, but this is not what the market says (Options, Euro-dollars and Binary options all point to a 25 bps for now).

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