Wednesday, October 10, 2012

Quick longer term look (6 months) at Risk/Credit vs UST cyclicals

Sometimes its easy to get stuck in the mud while looking at the i thought i'd take a step back and try to look at the forest.  My favorite way to do this is to compare 10yr treasury yields vs Risk and Credit.

For Risk, we have EURUSD, Crude, and ES

For Credit, we have HYG (green), and CDX HY S18(blue) (ES tags along for the ride)

In both cases, note that 10yr yields have outperformed the recent weakness implied in risk / credit assets (except for crude).  I can allow crude to deviate from the rest of risk assets because there are many externalities that affect prices in the short run. 

I have 2 immediate thoughts on the UST story.  1st, this months auction concession (selloff) in UST space has been rather weak (only 14 bps at best for 10yr yields...i normally expect closer to 25 from peak to trough).  This flows right into my 2nd thought which is that the Fed's QE3/4 (if twist was QE3, then QE4, else QE3) of MBS flow purchases has given a slight bid to the US rates market in general.  I can accept that explanation for why UST yields have outperformed the recent risk/credit asset selloff.

Like every other trader, my next thought whats next?  Well, with this new baseline (general UST bid/strength from QE4) this should make the rally into month-end rally jawdropping this month.  If there is a convergence of the above markets in the next week or so, that could provide a springboard from which treasuries could launch into a larger than normal rally (especially with the Fed removing the entire 30yr auction supply). 

Just think about it...if auctioning off 21bln 10yr notes and 13bln 30yr bonds don't create a decent concession, then the opposite side of the equation must balance by being larger.  However,  while this still argues for a UST rally in the 2nd half of Oct, I want to trade from a position of strength, which in this case means buying UST in a moment of relative weakness.  Here's to hoping that we see one!!

govttrader out...

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