Watching Bonds

by Larry Levin

As the weeks progress I believe the debate to cut interest rates further will become more heated. As my friend Rick Santelli likes to say, "Wall Street would like to see rates at zero...with a tightening bias"...but some Fed officials may not vote for further cuts.

Perhaps most devastating to the market last week were comments from Philadelphia Federal Reserve President Charles Plosser. Mr. Plosser spoke against overly aggressive rate cuts since that could/would lead to higher inflation, which I believe will now take on more serious consideration.

"There are those who have expressed the view that in times of economic weakness, the Fed must not worry about inflation and should focus its entire effort on restoring economic growth by dramatically driving interest rates down as far and as rapidly as possible," Plosser said, calling this a "damn the torpedoes, full speed ahead" approach to policy. Ignoring inflation during times of economic weakness "risks undermining our ability to achieve economic growth over the long run," he added.

As I mentioned last week, Mr. Plosser went on to say: "It [monetary policy] cannot solve the bad debt problems in the mortgage market. It cannot reprice the risks of securities backed by subprime loans. It cannot solve the problems faced by those financial firms at risk of being given lower ratings by rating agencies, because some of their assets are now worth much less than previously thought. The markets will have to solve these problems, as indeed they will. But it will take some time."

So the Fed may put further rate cuts on hold for the reasons mentioned above, but there are more. Commodity prices are still skyrocketing; wheat has recently been limit-up 3-days in a row. Soft commodities look to be finally starting a major bull advance. Of course, other commodities are still very bullish, as evidenced by new all-time highs in the CRB.

Two other brand new issues may also have an effect on the tape very soon, both coming from the bond market. The first is from the TIPS (Treasury Inflation Protected Securities) market. TIPS have recently popped higher, well above a long consolidation period. This means investors who buy TIPS are starting to get very nervous about inflation.

The other bond market issue is the auction process. The Treasury auctioned a tranche of 30-YR bonds last week that nearly fell on deaf ears. Demand for these securities at such pathetically low yields (locked in for 30-years!) is running out of buyers. Without massive amounts of buyers, bond prices will fall - driving up interest rates. So I say: Keep an eye on the bonds!

Real Time Trading Signals*for

Trade Date: 2/8/07

E-Mini S&P Trades*
(before fees and commissions):

No Trades Today

E-Mini Russell Trades*
(before fees and commissions):


1) Buy @ 8:40am at 702.0 = -1.2 (1 lot)

2) Sell @ 8:44am at 701.9 = -1.2 & -1.2

3) Buy @ 9:08am at 707.8 = -1.2 (1 lot)

4) Buy @ 9:56am at 705.4 = b/e (1 lot)

5) Buy @ 10:14am at 707.3 = +.5 & -1.1

6) Sell @ 12:50pm at 697.7 = +1.0 (1 lot)

7) Buy @ 1:03pm at 696.1 = b/e (1 lot)

8) Buy @ 1:21pm at 698.7 = +.8 & -1.1

9) Buy @ 1:47pm at 697.4 = b/e (1 lot)

10) Sell @ 2:15pm at 696.9 = -1.3 & -1.3

11) Buy @ 2:21pm at 697.2 = b/e (1 lot)

12) Sell @ 2:25pm at 697.4 = -1.2 & -1.2...-$970


Sign up as an AvidTrader Member to receive "The Technician" Value Area's each day. The market then has an 80% chance of filling the Value Area. Many traders familiar with the Value Area and the techniques that go along with it use it to help them decide what trades to do each day. Join and see how this technique can help you trade more successfully!

Log in for Larry's Daily Trading Tip each day too!