Thursday, September 13, 2012

30yr auction setup

With 8 hours to go until the 30yr bond auction, its time to talk about setup.  The long end of the treasury market has seen a pretty decent concession built it, with both 7/10 and 10/30 curves steepening over 4 basis points in the last week.

Combine this with the outright drift to lower prices in the market ahead of what the stock market seems to be an imminent announcement of QE3

It took treasuries a week to get back in line with stocks after that massive short covering event on friday.  However, the movement in stocks was all based on QE3...which should be both stock and bond positive.

Now, while i expected (and called) for these 2 lines to converge, the Fed watcher in me thinks that the market is of 2 separate minds.  If the market wants to price in QE3...well stocks are doing that already.  QE3 would be mostly a mortgage led event, which most closely resembles 7-10yr UST the 7yr paper relative strength is not surprising...but I would like to go so far as to say that I expect much more 7yr strength than we've seen for pricing in QE3.  Since that hasn't happened, there is no reason to think that 30yr paper will be treated any different over the next 8 hours than it has been for the past 72. That is to say, nobody seems to want it.

With that background in mind, lets turn to market profile.

Even in the 7yr sector (no 7yr auctions this week), Market Profile has seen the center of value walk down and down to lower prices for this auction week.  This means that QE3, while a risk, has not been the focus of market participants. With the largest DV01 auction coming up this morning, I don't think most market participants will be coming out of the auction long the paper they bought...most will want to come out flat, which means more auction concession selling.  We are just about at the top of the micro bell curve in 7yr paper as i write this at 4am, but the 30yr has barely budged (7/30 curve has steepened 2 bps so far today).

With a 13bln 30yr auction coming at 11:30, there is no reason to buy 30yrs in the secondary market.  So, using 10yr futures as our guide to selling 30yrs is difficult today, because of the QE3 implications.  The 30yr bond has already sold off and cheapened on the curve, which means most of the setup for this auction has already taken place.  The best trade setup for those not yet involved would be a pop in the 30yr from a profit taker before the auction.  There is no guarantee we will see that, but it is something to keep an eye out for.

This is probably just a long winded way of saying, i plan on selling strength today in the 30yr and covering in the auction.  I'm pretty confident that i'm not the only one with this plan.

govttrader out...


  1. Wow, 30 year futures moved 2 times less than usual compare to 5 and 10.