Monday, November 26, 2012

This Week Is 30yr UST Buying Heavy - 10/30 Curve Should Flatten

In a world where flow is the new QE, this week is an alignment of the stars for long end UST traders.  Not only is this the week that the long end tends to outperform due to the month-end index extension (estimated @ +0.07 which is average for a refunding month), but this week has 4 long-end Fed buybacks via twist POMO.  I normally don't take positions overnight or over multi-day periods, but last week and this week are exceptions.  When the 10/30 curve was hanging above 115 last week, that was a gift.  The combination of month-end buying for the index extension this week (real money scheduled customer flow buying combined with program front-running activity) combined with the Fed's unusual activity this week (4 long-end buybacks..that's almost every day and includes extension day) and it should take an act of congress (literally...such as a fiscal cliff resolve) to keep the long end from outperforming this week.  I've been in the 10/30 flattener trade since 115.3 on Nov 20 (very small daily negative carry...but almost zero).  I expect there to be a good push at some point this week to below 112 to provide an exit.  Any steepening moments this week are to be faded.

On the outright market front, UST has outperformed stocks today by 4 bps (stocks are surprisingly unch).

 The UST seller from Tuesday Nov 20 is just about @ breakeven.  If ZNZ2 gets above 133-24, i expect there to be some short-covering activity in the market.

(note for TD thinkorswim users...the generic contract ticker for /ZN and the other long-dated UST futures contracts were rolled early in the software...i suggest sticking with /ZNZ2 until the end of the week to see where the volume is trading)

govttrader out...more later on twitter

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