Treasury Trading Update.

There is a fair amount of trade occurring that would indicate prices of Treasury futures will be heading lower moving forward. That of course has been my strong opinion for quite some time. Back in Mar. I was an adamant seller of the market with prices in the mid 117 range and we did go lower from there bottoming at 11426 on the 5^th of April. Instead of continuing to trend lower price action has reversed higher since that low culminating at Fridays high of 11731 vs. the June future. The market has been enduring several crisis since the 5^th of April with the downgrade of several sovereign countries debt – mainly focusing on the “club med” countries Greece, Spain, Portugal, and to a lesser extant Italy and Ireland. There currently is talk that the UK could face a potential downgrading of it’s debt shortly after the elections, if no solid fiscal plan is forth-coming. The US certainly is a candidate for a ratings review. So the question is will the music subside a bit. This weekend seems to have produced an agreement to get some much needed funding for Greece. Political rhetoric will be stifled as the elections conclude in some European countries and markets may have a chance to focus on other things, but things as always are evolving.

Some of the evidence for higher yields I sight of-course are commodity prices and also some of the preponderance of put structures trading in 10year options that are targeting a move to 114 area. The overall all price range has been basically between say 119 area and 114’20 area going back to July of 09 on the wides. If you look at the range since Mar. then you’re looking at the 117’16 to 11800 area to just below 115’00 area. The most successful trade with the benefit of hindsight has been to sell strangles and very well may remain the best strategy moving forward. Some of those plays recently involved selling the June 118 calls and the June 115 put.

I do expect commodity prices to be a deciding factor and to eventually force yields higher in the longer end of the curve. If you look at the CRB chart below you will see that it is mimicking the price pattern described for the fixed income futures just inversely. A move above 280 will put pressure on 10yr. yields to push through 4%.