Thursday, August 9, 2012

So where do we expect the bond market to bottom today??

I have 2 thoughts on this.  First, we all know that the 30yr bond auction (the land of the big DV01) is the single largest duration event of the month in the treasury making any kind of "long" stand is usually not the optimal strategy.  But, given this summer illiquid that would be nutz!!

However, we can;t be short forever...there will be a bottom.  The question is...where?  Market Profile can help us with that.  Given today's mode (center of value) coming into the day in ZN futures at 133-12+.

We can look at the recent trading history / volatility, and gauge a larger range around that mode.  Just a little basic symmetry takes ZN to 133-00.

The million dollar question is...will the 30yr auction tail...creating a temporary free fall...or will this healthy concession we've seen built up over the last 2 weeks be enough?  Given the illiquid environment (bond volumes are pretty low for an auction day) still looks like potential for a tail.  So...the higher probability trade is to use the auction to get long by bidding for a tail thru your friendly primary dealer.  And for those who don't trade thru a primary dealer for whatever reason..just watch the futures market...there is usually a chance to buy bonds at or even below the stop in the secondary market anyway.

The takeaway is...this week should mark the high yields for the time being.  We are not in a trending market...the downtrade in bonds has been auction setup selling...not levered selling.  After the auction process clears...we should revert back to "fair value."  More on that later.  But be warned...the bottom of value is still farther below...don't look for large buyers to come in just yet.

govttrader out...

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