Any one of the upcoming US non-farm payroll reports could bring forth a historic event in US Treasury prices! With the US Federal Reserve standing by their intentions to hold US interest rates down and recent housing numbers showing a bit of weakness, it would seem like expectations about the pace of the recovery have been tempered again. With the latest monthly US PPI report showing a contraction in the headline readings, it would seem like classic indicators are signaling that inflation remains under control. However, it is also clear that inflationary expectations remain a problem for the Treasury market, which came under apparent speculative selling pressure on the morning of October 21st in the wake of a slide in the Dollar and a recovery in a host of physical commodity markets. We think that renewed fears of a slower than expected recovery are set to provide firm support under the Treasury market in the coming three weeks. In our opinion, the Treasury market probably won’t even be allowed to slide below the October lows (118-20 in December bonds) or perhaps the mid September lows (118-07) in the coming weeks.
In looking forward we would expect the November 6th unemployment report to become a major decision point for the Treasury market. With the recent doubt on the recovery pace surfacing, the market could be poised for another sharp pulse up move that could put prices back up to the early October highs. On the other hand, if the non farm payrolls “loss” in the October report is smaller than the prior month (which was -263,000) and the unemployment rate rises by less than 0.2%, it is possible that the market could give way and force the US Fed to battle the tape.
In conclusion, we suggest that traders look to implement a breakout strategy using somewhat close-to-the-money long December bond put and call options. For those that can stand a more complex strategy and would like a longer term breakout window, we would suggest a combination of calendar spreads.
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Suggested Trading Strategies:
* Shorter Term: Buy a December bond 117 put at 0-39 and also buy a December bond 123 call for 0-49. Look to risk a net loss on the combination of $500. Look for an objective on the long put of 2-50 or an objective on the long call of 3-21.
* Longer Term: Look to sell 1 December bond 118 put and buy a March bond 117 put for a net cost of 1-18, and then look to sell a December bond 122 call and buy a March bond 123 call for 1-17. Risk the double combination to a net loss of $1,200. Use a short term objective of 10 on the short December 118 put and a short term objective of 15 on the short December 122 call, or exit all the short December options just prior to the November 6th unemployment report.
If you’d like to further discuss these strategies to determine the best execution strategy for you, contact Daniels Trading.
About Daniels Trading
Daniels Trading is a relationship-focused commodity futures brokerage located in the heart of Chicago’s financial district. Founded in 1995, they have a history of providing effective and reliable trade executions to both individual traders and institutional investors around the globe. In addition to a focus on relationship and execution, Daniels Trading is a leader in providing ongoing education opportunities and resources for customers.
