Tuesday, August 21, 2012

Whats with the big moves in the asia session treasury market?

At 8:20pm NY time, 24k ZN contracts were bought in the futures market from 132-22 --> 132-28.  Most likely a dealer was lifted on 2bln 10Y notes, and this was the only way to get back the duration (i've been in this situation before).  In the overnight session, this is a large trade (normally, less than 1 bln 10Y notes trades in the entire overnight session...never-mind a single trade), however, in the context of a normal NY session, this is small (typical NY session volume in ZN is over 1mm contracts).  So, I would expect the market to react as it has to this trade, but long term (aka...a day) this will ultimately be insignificant.  However, small players will get scared by this, and it may even cause some stop outs.  I'll wait till the London open to assess the situation...this may create some very interesting opportunities.

On the flip side, is it possible that something has changed (ie...has the market transitioned from tethered to trending?)  While I find this unlikely, we don't definitively know the answer...so...we'll wait for the London morning and see how things shake out.

govttrader out...

UPDATE 5:50am

The move in US Treasuries (and a similar, albeit smaller move in S&P futures) came on the heels of very weak trade data coming out of Japan.  The 2 key numbers were a 25% reduction in exports to Europe and an 11% reduction in exports to China.  These are huge decreases.  If this is indicative of things to come for US exports to Europe and China (and China's global growth engine), then things will indeed get very bad in the US (if you think they aren't already).   Follow through from this type of data should push 10yr yields back to sub 1.50%...ultimately 1.25% or even 1.00% are doable if we start to see the corollary to this trade data show up in US econ data.

For the moment, I'm satisfied with the possibility that the Market Profile mode might have shifted...and there is no trade for me here...yet.


  1. I was also watching as this happened. Very strange. I had just gone short a few contracts at the previous 2 day high ... Just my luck.

  2. By the way, isn't the duration of these the same as cheapest-to-deliver above 6 1/2 year mauurity bonds - which would be the 7-year, I believe?

  3. Yes, the duration of ZN Ten Year Treasury futures are in fact closer to 7yr paper (depending on which off-the-run 10yr is the cheapest to deliver...which is a function of the level of rates and the 6.5/10 curve). However, when trading large DV01 positions, the big risk is outright moves...rather than 7/10 curve risk. The futures market tends to provide the best liquidity. Even though the best hedge when getting lifted on 2bln 10yr notes is in fact buying 2bln 10yr notes...that isn't always an option for the dealer. When these types of things happen...the dealer just has to deal with working out of the 7/10 curve after getting flat duration.