Wednesday, November 13, 2013

UST 10yr Auction Post Mortem

The UST market grinded higher today, right into the 1pm (ET) 10yr auction. The 10yr auction came at the EXACT high print of the day on the current 10yr note @ 2.75%.   This is uncommon for a low volume day (i was expecting a tail...instead the auction came on-the-screws, at the high of the day).

Typical trading volumes for a 10yr auction day are around 450bln 10yr equivs. Today we are at 240bln 10yr equivs (asof 1pm), and on target for a 360bln 10yr equiv on track for an 80% volume day.

The USD index (DX) was weak today, which typically creates strength for US Treasuries. This held true today, and probably explains a portion of the bid in the UST market going into the 10yr auction.

(pictured are 10yr futures vs inverse DX futures)

While there is no use crying over spilt milk (most traders go into the auctions short, and then bid to cover that short, hoping for a Dutch treat), lets start to think about what this means for tomorrow's 30yr bond auction.

We know there was a large-ish UST short position initiated after NFP on Friday.  I can only surmise that this aggregate short position (combined with general USD weakness) is responsible for the strength in todays 10yr auction.  With the treasury market still sticking at the highs of the day (in fact making a new high as i am writing this), it feels safe to assume that there is more short covering to be done.

This is the backdrop as we now begin our approach into tomorrow's 30yr bond auction.  30yr bonds have underperformed on the curve today, which tells us that a short 30yr setup has already begun (possibly outright..possibly on the curve).  We will have more clarity on that point tomorrow.

Trading volumes were very low going into the 10yr auction..and are still low 30 minutes after the auction.  It feels like a significant sized group of market participants are not participating in the US Treasury market.

More later on twitter


  1. Got turned onto your blog from ZH articles. For this chart of 1/DX vs 10 yr -- is this something you recommend arbitraging? Betting on a spread compression between the two?

  2. inverse DX is more of a momentum indicator that i use to gauge performance of US Treasuries, rather than a direct trading relationship. You could of course measure the relative performance over time and come up with a trading strategy based on that relative performance...and that would make sense. I would simply encourage you to look at the relative performance over multiple time frames, to make sure you don't find yourself on the wrong side of a divergence.