The 10-Year Treasury note hit an all time low this week, and we think additional downside may be in store. The primary catalyst for the fall is the much anticipated FOMC meeting on September 20-21, where it is expected the Fed will announce 'operation twist' to combat the dismal current economic scenario. Twist refers to changing the shape of the yield curve such that the longer dated rates go down with respect to shorted date maturities - basically flattening the curve by selling shorted maturity bond and using the proceeds to buy longer maturity bonds.

We believe that Operation Twist will have some impact, at least temporarily ('don't fight the fed'), and further reduce the 10 year yield. Along with operation Twist there are few other factors that will exert pressure on treasuries

1. The disappointing economic conditions show no signs of improving, with a stagnant jobless rate and Beige book data.

2. Obama's speech on job creation later today will likely disappoint the market.

3. The European contagion is by no means over and will continue to push investors to safe-haven investments like treasuries.

For interest rate products like bonds and notes, prices move inverse to rates, so a decline in the 10 year rate will be seen as an upside move in prices. The sale of a simple vertical put-spread on the iShares Trust Barclays 7-10 Year Treasury Bond Fund ( IEF) would be a relatively safe way to monetize this opportunity. Option quotes are relatively wide, so try the complex order book with a limit order to sell the spread for net credit of $0.30. No stop either way, given the limited loss potential of $0.70 in the worst case.

Trades: Sell to open IEF October 103 puts at $0.90 and buy to open IEF October 102 puts for $0.60. 



Henry is the president of Trade Alert LLC, a provider of real-time options analysis tools to leading Wall Street firms. His systems analyze hundreds of thousands of transactions per second to help professionals identify and interpret market activity in real time, supporting informed trading decisions and intelligent idea generation. He has held institutional trading and management roles with Bank of America, Bear Stearns, Salomon Brothers and the Hull Group, and made markets on the CBOE and AMEX floors in the US, and EUREX and MONEP overseas. Prior to founding Trade Alert, he led the electronic market-making group at Bank of America coincident with the launch of the International Securities Exchange.

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At the time of publication, Henry Schwartz held no positions in the stocks or issues mentioned.

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