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.


  1. Look to be a buyer of the 30 year? Five weeks in a row of extreme pessimism in C/P ratio, the Dec 6th morning star on negative news, last Thursday and Friday's tweezers double bottom (March contract) to the fallback drawn from Nov 26 through Dec 9, open interest is 150,000 less now than Nov 26, last week was an inside week, monthly slowsto have not been this low since 2006 while bonds were 25 points lower. There's fear in the long end now; everyone just knows that long rates must go up! Could the new information and surprising price action be that on a taper announcement that long yields collapse? After all, it was the threat of taper that commentators attributed to current sell off which began in April. Once any taper does begin, why would the market continue to sell off? Wouldn't any test of the Dec 6th whipping of sellers be another chance to buy?

    1. "That's all the fun there is - being right by using your head." - Jesse Livermore

      Stay long until all the headscratchers finally get it and the headlines are plastered with all the reasons why yields just have to keep falling?

  2. Replies
    1. No. I just found you while on Zerohedge and like that you focus on the Bond market. So, did I just get lucky this week or nail it?