With each passing month of disappointing payroll data, the subsequent month's report seems to take on greater significance. The anticipation for this Friday's report is now approaching End of Days proportions. While this latest chapter in the Labor Department's never-ending tale won't save our souls or offer eternal salvation, it might provide a means for more earthly gains. The prevailing belief is that the only thing preventing the Federal Reserve from raising overnight lending rates above 1% is a lack of job growth. The latest prophecies are for the March report to show an increase of 130,000 new nonfarm payrolls. Some preachers of "the recovery is now, and the world of low rates will end on Friday" gospel are predicting growth of as many as 250,000 jobs. It is this hope (or fear) of a big number that has many traders looking to position themselves for a selloff in bonds. However, other factors are at work that make being short bonds the trade of choice as well, including the lack of value at current yield levels, recent rumblings from Fed members that a move is imminent, signs of inflation, expectations for strong first-quarter earnings, and the possibility that Japan may be backing away from its currency intervention policy. (These issues were discussed in Tony Crescenzi's article earlier this week.)
Bonds, Futures and Options, Oh My!
Thanks to ever-expanding offerings, investors have a multitude of bond-related trading vehicles. But while bond futures and related options probably provide the most accurate, liquid markets for trading Treasury instruments across all duration periods, they have certain aspects (such as the need for a commodities futures account) and pricing structures that can make them inaccessible and inappropriate for many retail investors. (I mentioned many of these issues in a past article .) The Chicago Board of Options Exchange offers options on four different interest rate indices , ranging from one with a 13-week duration to one that tracks rates on 30-year bonds. But the main drawback with these products is that you cannot trade the underlying indices. This leads to a severe lack of liquidity in the options markets, because no spillover volume in the form of hedging or combination positions can be generated. For example, the April options of the CBOE 10-Year Treasury Note Index (TNX) had open interest of fewer than 1,000 contracts as of Tuesday's close. If you do choose to wade into these markets, keep in mind that they are focused on yield, not price; if you think yields are going to rise, you should buy calls.