Wednesday, February 13, 2013

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), 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...

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