Wednesday, August 8, 2012

10yr treasury auction post mortem

So the UST 10yr auction tailed 2.5 bps from the 12:59pm bid side level, coming in at 100-30 in the current 10yr.  The 10yr market quickly traded 5 ticks below the stop (100-25+), and then back up above the stop.  This means that dealers had to take more paper than they had anticipated given their short positions going into the auction, and are long excess paper (maybe a few billion) from the auction stop (100-30 on the CT10yr, which is about 133-13+ on ZN).  From a Market Profile perspective, the auction came below the bottom of the bell curve, so it was a very good purchase from a value perspective.  Primary dealers took 54% of the auction...most of which was covering a short position going into the auction.  I suspect they will attempt to wait for the market to get a little higher before offering out the remainder of their position, as we are still well below the center of value. 

The next risk event is tomorrows 16bln 30yr treasury auction.  With this 10yr tail squarely in the rearview mirror, expect the dealers to have set a larger amount of 30yr shorts tomorrow, which should decrease the tail tomorrow (game theory- and market participants have a pretty short memory).

In the remainder of the month of August, the Fed will buy back 10 bln of the 16bln 30yr bonds to be auctioned tomorrow.  This purchasing flow, combined with the greed that todays 10yr auction tail will most likely create, should make tomorrow's 30yr auction pretty interesting.  I can imagine there being more setup volume occurring tomorrow, followed by a stronger auction. 

Of the last 13 new 30yr bond auctions (not re-openings, but new issues...going back to May 2009), buying 30yr bonds in the auction and holding the paper for 24 hours has been profitable 13 out of 13 times.   This stat is making its way around the street, so expect an additional amount of players in tomorrows auction. Should be bullish.  Also, shorts in S&P futures have been building as many Elliot Wave technicians have been talking about an  upcoming cliff in the S&P, as they look for a 100-300 point drop in the S&P 500.  This should be bullish for 30yr treasuries as stocks seem to be full of Central Bank hopium lately.

more later...good luck trading...govttrader

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