Today the treasury auctioned off 16bln 30yr bonds at 1pm (ET). This occurred during a fairly volatile backdrop. Janet Yellen was answering questions from the Senate for much of the "setup" period. Her testimony was fairly QE - supportive, and so the bond market rallied during her entire testimony. Then we had a 3.5bln 10yr POMO @ 11am (ET) 2 hours before the auction. This was the pre-auction crescendo that many day traders are familiar with.
Bonds rallied right into the 20minute period after the 10yr POMO in a crescendo of volume....and then fell back down to the overnight VWAP after the 1pm 30yr auction tailed 1.5 basis points.
(pictured are 30yr UB futures vs inverse DX futures)
I suggested selling bonds at 11:20am this morning into the crescendo of volume, and covering after the auction. As a trader, i couldn't really think of anything else to do.
Up until the 10yr POMO, the 10/30 curve was stable at 108 basis points. This indicated that a concentrated short setup had not taken place. However, after 11:20am, 30yr bonds started to underperform (both outright price and on the curve), indicating that the setup (selling bonds pre-auction) had begun. I thought the timing of this setup selling very coincidental.
While the treasury market is still generally strong post-auction (the belly inparticular), the fact that the 30yr auction tailed indicates that the large short base pre-Yellen speech release has mostly covered and the market should be fairly stable in the current price range.
Typically, the treasury market builds a concession pre-auction, and actual investors of US Treasury paper buy these auctions to get long. Today that is a scary trade (getting long) because the market has repriced higher after Yellen's early-release speech last night.
As a day trader, i won't participate in that trade...but as a portfolio manager, i'm sure that many are.
With Janet Yellen at the helm, its clear that the economy will need to clearly demonstrate deep economic strength before she will consider reducing QE...and that may be a long time away.
If you are interested in this type of bond market commentary intraday, in addition to following along with the trades that i am doing in the market, then i suggest trying out my paypal subscription twitter feed.