Thursday, December 12, 2013

30yr UST Auction Post-Mortem

Today the treasury sold 13bln 30yr bonds (re-opened the Nov-2043 issue).

After yesterdays fireworks following the weak 10yr auction, tensions were high going into today's 30yr bond auction.  Going into the auction, the 30yr bond had been outperforming on the curve all day (which is surprising on a 30yr bond auction day).  The belly/front-end of the curve saw decent selling, but the 30yr did not (again, very surprising for a bond auction day).

Going into the auction, the wi 30yr ("wi" = "when issued" - which is what we call a bond before it is auctioned) was trading 3.89%.  The 5yr and 7yr points on the curve were trading near the lows of the day (the 30yr bond was trading 97-17+ @ 3.89%....and the low price pre-auction had been we went in to the auction pretty close to the low).  The auction priced 97-10+ @ 3.90% (so, a 1 basis point tail = 1bp cheaper than where the bonds were trading in the secondary market going into the auction). 

Now, this is the exact same type of result that we saw at yesterdays 10yr auction (1bp tail) but the lead up to the auction was entirely different, and the price action post-auction is also completely different.  Yesterday, the market rallied right into the auction and went in right near the day's high. Today, the mkt sold off pre-auction, and we went in close to the lows (the 30yr bond was strong on the curve...but outright price was still lower on the day - especially if you look at the belly of the curve).  Yesterday, the auction tailed 1bp, and the mkt sold off like a banshee.  Today, the auction tailed 1bp, and the mkt hasn't really gone anywhere...the mkt is going sideways in-between the auction stop price and the pre-auction price.  This is VERY RARE for a 30yr auction.  The result is almost always a big surprise one way or the other.  I was saying before the auction that the entire mkt felt very weak, which indicated a tail was coming.  Since i went into the auction short and was bidding to cover that short and get flat, i was hoping for a much larger than 1bp tail.  The result of only a 1bp tail was a "meh" result (still made a trading profit, but i was hoping for more).  For a 30yr bond auction, i would consider a 1bp tail a practically "screws" result...and that explains why the mkt is just chopping sideways since the auction..this means the mkt was perfectly positioned, everybody is happy and nobody exited the auction with too many or too few bonds from the result.

If you are wondering "what next?"  Well, next week the US treasury is auctioning 2yr, 5yr and 7yr notes.  This is unusual (these auctions typically take place in the last week of the month) but the holiday calendar has pushed things up.  This may partially explain the weakness in the 2-7yr part of the yield curve.  Also of concern to the belly and front-end of the curve is the article recently published in the NY times talking about Fisher's views of forward guidance.  His comments on forward guidance were very "indecisive" regarding the front end of the curve, where the mkt has experienced and was expecting the more reliable "lower for longer" mantra.  This combined with the auctions next week are both reasons for the front end of the curve to sell-off...and so it has.

Until we get new information, or surprising price action, i'll be flat and waiting.

If you would like to see my thoughts on the UST market intraday as well as see my actual trades in real-time, then i would suggest joining my private twitter feed.  The signup link is on the top-right of my blog.

Wednesday, December 11, 2013

10yr Auction Post Mortem + 30yr Auction Thoughts

Today the US Treasury auctioned 21bln 10yr notes (re-opened the Nov-2023 issue). 

Going into today's 10yr auction, ever since the NFP number at 8:30am on last Friday, the US treasury market has been in short covering mode.  There was a markets survey that indicated the active trading participants in the treasury market were extremely short (by over 30% which is huge) a full week before the NFP data was released, and the short position continued to build as we approached NFP.  The NFP number was strong (+200k jobs) and so the mkt immediately repriced lower as you would expect.  However, the important piece of information was not the NFP, the important information was the mkt's aggregate position (very short going in), because in the end, it is positioning that drives trading activity.  So, what would you expect this large community of shorts to do after the market dropped in their favor because of the strong NFP data?  If you said "cover their short by buying the market," then you would be correct. 

Normally (in the past), this type of short covering event would take place in a single day.  However, because this net short position took multiple days to develop (since Dec-1), and was so widespread (not only was the short position large in size...but it was large in the number of participants that were involved), the following short covering rally has taken a full 4 days to work thru the market.  I can say with confidence that now, that large short position has mostly been covered.  This does not mean the market is long...this just means that the market no longer has an embedded short position that needs to buy to cover.  

From all our lessons on market behavior, we know that when the last short covers (is done buying) the market stops going up (no more buying) and falls back down to around where it all started.  I think we've just about seen that.

So, the question to ask is "now what?"

Tomorrow we have the 30yr bond auction, and next week the 2yr, 5yr and 7yr auctions.  So, the market will need to reset those shorts to absorb the upcoming supply.

I could say a bunch of other fluff to fill space, but that really is all there is to it.  The mkt must have a certain amount of short position embedded to make room to buy the supply (auctions), and so, i expect a pop in the market to be sold to facilitate that supply process.  If the market does not "pop," thereby not enabling the market to get short again, then i expect last minute setup selling, and perhaps another tail in the 30yr auction tomorrow.

That's about all the strategy I have for now.  Levels will be available on the private twitter stream.