Wednesday, October 10, 2012

10yr auction post mortem - short covering

Just like we talked about pre-auction, today's move in stocks implied a higher 10yr price.  That price was confirmed in the 10yr auction a few minutes ago.  The auction numbers were very strong (bid/cover ratio was 3.26 vs 2.85 prior....dealers only took 36% vs 52% came thru 2 basis points vs the 1pm bid price).

Now that today's stocks vs treasuries divergence has been rectified, lets start thinking about tomorrow's 30yr auction.  Most shorts seem to have covered (12 bln 10yr equivalents traded in the secondary market just post that minor hurt feelings...with all recent flashes being offers lifted), so its all up to stocks now.  If stocks get to the lower edge of their bell curve (1420), that should provide a pop in the treasury market that we can sell to setup for tomorrow's 30yr auction  (ZN @ 133-12.....97-24 bonds??).

Remember also that tomorrow's 30yr auction is less about supply, and more about temporarily holding some balance sheet, as the Fed will be purchasing 10 bln 30yr duration in the remainder of the month of October twist purchases.  I expect the market to rally out of tomorrow's 30yr auction (if circumstances allow).

Govttrader out...

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