Post-Mortem from yesterday in pictures

Presented with minimal commentary.

Just a quickie - 30yr bond auction stat

That stat we've talked about every 3 months...its back...now 16 for 16 (still shooting 100%)...new 30yr bonds followed by rally where bonds purchased at auction can be sold within 24 hours for greater than 20 ticks of profit (in this case..12-15 hours was the sweet spot).

see you in 3 months people....govttrader out

UST 10yr Auction Post Mortem

That has got to be one of the least volatile 10yr auctions i've seen in a long time.   From yesterdays close ES is unch and ZN is 12 ticks lower.  The stats and just about everything else about this auction are quite unremarkable.  Dealers took 47.7% of the auction, directs as has recently been the case ended up with a sizable 24.2%, while indirects took only 28% of the auction.  I am interpreting the 1bp tail as the curve concession that the RV traders were unable to recognize in the setup.  Since cash 10's did not cheapen in the setup...the short base must not have been as large as the market estimated.  All thoughts are now focused on tomorrow's 30yr bond auction..and here is my take of the price action (or lack thereof) that the 10yr auction has provided us.  While total volumes for the day seem only slightly lower than "in line" with a 10yr auction day, we must presume that there was enough short covering clashing with "last minute setup"  pre-auction to give us this 1bp tail result  (a very large short base would have resulted in a thru result)....net-net, the market does not seem to have a leveraged position one way or the other (i would skew to the mkt being small long given the post auction price action).   This argues even more strongly for a 10/30 steepener as a setup for tomorrow's 30yr auction, if you can get it on south of 120.2, as well as continuing to sell pops in the 30yr overnight.   With very little volatility post auction (mkt leaking lower), the positioning report is harder to create...which again argues for a fairly flat to small long position assumption.  With the market just sitting around the auction stop and any trading taking place not able to move the needle more than 3 ticks price-wise...i imagine that i am not the only trader thinking these thoughts (sell pops...and put on a steepener to setup for tomorrow).  Also, coming out of tomorrow's 30yr bond auction...i want to enter into a long UST / long ES trade from north of 15bps cheap (13 bps cheap as i write this). 

The relationship vs ES is a great way to gauge how an auction setup progresses.  Today, the range was 10 cheap to 13.5 cheap.   I would expect an opportunity to sell this spread north of 14-15 bps before the 30yr bond auction tomorrow.  While the long end auctions are not always the best opportunity to trade this spread...the recent cheapening of UST makes this spread attractive to short imo. We have not seen the large leveraged trader recently...rather, the market has simply built value concensus at lower and lower prices.  This makes sense as we are in the midst of the long end auctions.  How the market trades coming out of tomorrow's 30yr bond auction will be the best piece of information the bond market will have had in a long time regarding the macro direction of yields. I would not be surprised if we visit the lows made overnight Monday Feb 4 and the bounce out.  However, that is looking too far ahead.

govttrader out...

UST 10yr Auction Preview

Today's 24bln 10yr auction will be an interesting event in the treasury market.  Normally, issues being auctioned have both a curve and outright concession going into the auction (market participants sell the on-the-run issue to be auctioned in the secondary market, and cover that short in the auction).  On the margin, this has not happened heading into today's 10yr auction.  In fact, 10yr notes have richened as the setup for this auction has progressed.  This makes sense from an RV perspective (cash 10yr notes are very cheap on the 7-10-30 fly, so RV traders should be buying them vs 7's and 30's). Normally this RV trading behavior would take place AFTER / DURING the auction, rather than before, so the only concession we have going into today's auction is outright.  The treasury market has traded lower consistently over the past 3 days, and each time the selling was both auction setup related, as well as induced by the grinding higher nature of the Stock Market  (note - ES has continued to grind higher while consistently respecting its 3 month channel).  The bonds vs stocks model has been fairly range-bound...tending to bounce off any richening moments (my model now reads 10yr notes are 11bps cheap vs ES on the 7 month timeframe...and only 1 bp cheap on the 2 month).  I would read the outright concession on the 10yr note at about 5 basis points (would be 6-7 bps without the RV fly traders getting in the way).   With ES looking to stabilize around 1516-1518, it looks like the treasury market doesn't need to worry about an ES selloff in the next 30 minutes to create panic short covering.  The short base for the auction seems fairly well set, and i'd estimate the avg price of the short base to be around 131-17 in ZN....or 97-30 on cash 10yr notes.  So long as we stay below there (99% chance by the looks of it) this auction should go off without a hitch.  The tail / thru prediction for this auction is less certain.  We are 7 ticks off the low in cash 10yr notes...so any tail would probably come somewhere between here (96-20+) and there.  On the flip side, strong RV demand adds another set of auction buyers to consider.  As i've mentioned previously about before new 10yr note and 30yr bond auctions, over the past 3 years every new 30yr bond auction has seen rallies post auction 100% of the time.  Given that UST are trading on the cheaper side of the stocks vs bonds relationship, and we have seen "enough" of an outright concession...i don't see any reason for this cycle to be any different.  Dealers most likely want to come out of this auction long 10yr (both outright and on the curve).  I plan on using today to put on 1 unit of 10/30 steepener for the next 12-24 hours...and will look to add if we see more flattening after the auction.  I want to come out of the 30yr auction tomorrow long and in a 10/30 flattener...but we will have to see what the price action allows.

If today was the 30yr auction...i would be all bulled up to buy the auction and come out long given the price action.  Perhaps i'm not alone in that thinking..which will gravitate the auction to come on the screws @ 2.04

---In summary---

pros
-5bp outright concession in place
-UST are 5-10 bps cheap vs stocks


cons
-no curve concession
-US stocks have been grinding higher showing no signs of topping

I don't expect a tail.  Most likely we come on the screws to small thru.  I'm now in buy dips mode for UST...and i want to put on a 10/30 steepener...hopefully the price action post-auction allows that.