US Treasury Bonds Flopping Like Fish Out of Water

The bonds led the market down with a sell-off in the 10 yr and a spike in rates after fears started to rise in the bond market that the Treasury may not be able to control rates. The 10 yr yield finishing the day at 3.707% which is a substantial pop from its lows at 3.59% and this occurred after a very successful 5 yr auction. This could be because the curves are flopping around like a fish out of water or a possible stronger statement that the yields on the long end are too low.

You want to watch tomorrow’s (Thursday) 7 yr auction; we will have to wait to see how the results impact the bond, currency and equity markets. We have a slew of economic events that have the potential to move markets, we start with Durable Goods Orders for Apr at 8:30 EST, 8:30 EST Durables (Ex-Transport) for Apr , 8:30 EST Initial Claims for the week of 05/23, 10:00 EST New Home Sales for Apr, 11:00 EST Crude Inventories.

After Hours

Stocks traded flat throughout most of the morning hours, but then slipped late and the major averages were deep in the red when the closing bell sounded Wednesday. GM (NYSE:GM) led the Dow Jones Industrial Average (^DJI) to the downside after falling 20 percent and closing at session lows of $1.15. Investors dumped shares of the automaker on news some bondholders decided against converting debt to shares, which raises the risk of bankruptcy. Poor results from the latest auction of Treasuries also spooked investors. The auction is part of $101 billion of government debt issuance this week and the poor showing raises concerns that demand for Treasuries might be faltering–just when the government needs funding the most. Bonds fell and yields jumped higher. The news also put pressure on stocks and, after rallying 196 points Tuesday, the Dow gave up almost all the gains and fell 173 points. The NASDAQ (^IXIC) fell 19, but is still up almost 40 for the week. The CBOE Volatility Index (^VIX) hit a low of 29.62, but rallied late in the day and gained 1.69 to 32.31. Approximately 7.1 million calls and 5.6 million puts traded across the exchanges.

Bullish

Steel-maker Nucor (NYSE:NUE) shares bucked the bearish trend and gained 62 cents to $41.66. NUE and a handful of other steel stocks (X, AKS, and STLD) moved higher early in the day after a Jefferies analyst said the outlook for the group was improving; as steel inventory levels have fallen, but demand for the metal is likely to perk up when the economy improves. In the options market, volume in Nucor rose to 2X the typical levels, with 16,000 puts and 14,000 calls traded. Bullish trading surfaced in Sigma Designs (NASDAQ:SIGM), Applied Materials (NASDAQ:AMAT), and BJ Services (NYSE:BJS).

Bearish

Helix Energy Partners (NYSE:HLX), a Houston-based oil and gas company, gained 25 cents to $10.79 and options volume rose to 4X the usual levels. 5,600 puts and 630 calls traded on the day. 5,345 December 10 puts traded, compared to existing open interest of 158. In addition, with about 70 percent of the volume hitting ask-side, it appears that some investors were buying to open new bearish positions in anticipation of a move below $10 by the December expiration. Bearish trading also surfaced in Q-Logic (NASDAQ:QLGC), Comcast (NASDAQ:CMCSA), and Polycom (NASDAQ:PLCM).

Index Trading

Volume jumped in the Russell 2000 Small Cap Index (^RUT) Wednesday morning. The index was around the 500 level early when more than 70,000 June 560/570 call spreads traded. The spreads were being sold (selling 560s and buying 570s) for small premiums (35 cents) and the activity was probably based on the view that the small cap index is unlikely to move beyond 560 (12 percent) by the June expiration (23 days). Outside of that, the S&P 500 Index (^GSPC) and the CBOE Volatility Index had the most actively traded index contracts. 391,000 index puts and 462,000 index calls traded across all products.

ETF Trading

The ProShares UltraShort Bond Fund (TBT) saw increasing volume after bonds took a tumble Wednesday. The exchange-traded fund, which moves 2X the inverse of the iShares Long-Term Bond Fund (TLT), rallied $2.07 to $57.14 and options volume rose to 2X the average daily levels. Players were leaning heavily on the bullish side of the trade (bearish on bonds), with 48,000 TBT calls and 16,000 puts traded on the session. Beyond that, the Spyders (SPY), PowerShares QQQ (NASDAQ:QQQQ), and iShares Small Cap ETF (IWM) also had among the more actively traded index contracts. Roughly 1.8 million puts and 1.4 million calls traded across all contracts.

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