Best Trading Strategy Of The Week - Still Buying US Treasuries On Dips

If you are following govttrader on twitter, you already know the story.  Yesterday afternoon the market shifted value in US Treasuries higher, again.  Using 10yr Treasury futures as our reference point, 132-28 became the center of "value" yesterday (Thursday)...after the center of value originally being 132-16 on Wednesday. 

So, last night, I bought ZN @ 132-24 (documented on twitter), and this morning, sold my ZN to get flat at 133-02 (also documented on twitter) (twitter is the first place to get this info, so please subscribe to the govttrader feed for free). 

The Treasury market is again seeking a price level where buyers and sellers can agree for a period of time so they can transact significant volume just like any normal day (thus far, trading volumes have been pretty slim...but price patterns have been consistent with normal trading cycles).  The problem with this thinking is that we have month/year-end approaching, and there are people who MUST BUY Treasuries.  I'm talking about people who job description includes "purchase US Treasuries at the end of the month."  Unfortunately for those people, their job description is not a secret.  Front-running is illegal in the stock market...but...buying ahead of publicly known buyers....that is not illegal.  There is no guarantee that the price will go up..but trading is not about guarantees.  Trading is about managing your risk, and trading strategies that have a high probability of being profitable if pursued often enough (sort of like being the house at a casino).

I don't have much "new information" to add to the dialogue at this point.  Yesterday's govttrader article was pretty clear, and the twitter stream has all the relevant trading info.  Let this serve as my first public plea for all you traders out there (not investors..traders only) to follow along on twitter and create a dialogue.  I'm open for questions.

Oh, and by the way...the trading strategy is still "buy the dip".

govttrader out

Treasury Selloff Exhaustion Has Reversed - Next Stop - Month / Year End

2 days ago we talked about why US treasuries were cheap (both on an outright basis and on a relative value basis vs stocks).  While I make no prediction regarding the direction of the stock market (Tyler @ zerohedge gets all the credit for that), US Treasuries have outperformed both on an outright basis as well as on a relative basis vs stocks from Tuesday Dec 18, just as we thought they would.  On the blog we talked about using the bell curve and market profile to determine the best location to buy US Treasuries to leg into this trade, and yesterday afternoon / last night we got our perfect buying location (132-03 / -04 in ZN).

given the new 132-12 local high in ZN overnight...the bottom of the 1st bell curve is now 132-03...so that's where I will try to get long
— govttrader (@govttrader) December 20, 2012

So that's all history now...what to do next?

While I expect US Treasuries to outperform stocks and continue to rally up through month / year end, that doesn't mean i want to just stay long and expect treasuries to move up vertically.  Like everything else in the markets, nothing moves in a straight line.  My bias is now to be either long UST (buying on dips) or flat (sell pops).  There can still be some value in getting flat UST on pops, and then re-buying on dips, but we must be careful to watch how much volume trades in the screens so we don't miss the coming undersupply condition (the rare instance where we do get vertical price action after a large buyer asserts their position).  The bell curve and market profile will be our guide for these levels.  I'll be updating thoughts on these ideas and levels on the embedded twitter feed on the blog.

govttrader out...

The Treasury Market Appears To Have Exhausted The Selloff - Time To Reverse??

2 weeks ago I talk about how US Treasuries were rich vs stocks (ES in particular), and that monthly cyclicals would force treasuries to cheapen vs stocks.  On Dec 6 (on my prop model) i read 10yr yields as 14 basis points rich vs stocks.  At the time there were 2 reasons why i thought bonds would cheapen.  1)  they were rich on the model graph  2)  there were auctions coming, and the market likes to get short in front of the auctions.   Over the past 2 weeks, treasuries have indeed cheapened (24 bps from peak to trough).   (positive on the spread graph = 10yr cheap)

 
Now with the last auction of the year out of the way, and price action in the treasury market that appears to indicate an exhaustion, combined with additional price action that indicates short covering today, my prediction is that the time has come for treasuries to go back the other way (ie..time to richen vs stocks). 

With year and month-end only 7 trading days away (and 2 of those are early closes for the bond market), and 10yr yields reading  6 basis points cheap as of this writing (they reached 10 bps cheap yesterday at the height of the selloff), the higher probability trade is to buy weakness in UST while simultaneously buying stocks..expecting treasuries to outperform.  This trade makes no prediction about the direction of the stock market or global risk on / risk off sentiment  (when stocks prices go up, we normally expect treasury prices to go down).  We are just trying to capture the relative difference between asset classes.  December has traditionally been a strong month-end for treasuries.  The cyclicals for stocks are less clear..and the fiscal cliff drama makes this even harder to handicap...but the odds say this position should win more often than not, especially from these attractive levels.

The aggressive trade is just to get long US Treasuries...but the relative value trade is to get long both.  Like most things in trading, there is no guarantee that this trade will be profitable by year-end...but i'm a betting man, and i'm betting that it will.

govttrader out...

Reading The Bond Market Price Action Post-NFP

In order to make sense of the price action COMING OUT OF the number, we first need to know what positioning was GOING INTO the number.  Yesterday, the bond market rallied all the way into the 2pm 7yr POMO (a little unusual).  Since the day before NFP is usually a "position squaring day," we can assume this means that marginal shorts were covering those shorts.  So, with that in mind, the trading portion of the bond market (on the margin) went into this number FLAT or LONG.  So, with positioning out of the way, we turn to relative value.  As discussed Wednesday, UST yields were (and still are though not as much) rich vs stocks (10yr yields reached 14.6 bps rich yesterday). With NFP out of the way, the next major risk events are the 10yr and 30yr auctions next week (there is a 30yr and TIPS POMO Monday and Tuesday, but they should not have a significant impact).

 So, what is the conclusion?  On some days where NFP reprices the market, traders often "fade the move."  I do not think today should be one of those days.  I firmly believe that UST will continue to cheapen vs stocks as we approach the 10yr auction over the next few days.  I don't think I want to take that position into the auction itself...i'd rather cover before that.  However, we have 3.5 trading days to the 10yr auction, and in that time i expect some auction setup selling to take place (a resetting of those shorts that were covered yesterday).  On the margin, I expect the 10yr to continue to cheapen from these very rich levels.  With approx 9bps of cheapening left, i think expecting at least half of that amount (4-5 bps) is still reasonable. 

For those following the the German Bund market, which has completely ignored the US jobs report within the first 30min following the report, remember that EUROPE HAS ITS OWN SET OF PROBLEMS, hence why German 10yr yields are 34bps rich vs US 10yr yields...and the ECB wants to cut rates...yikes!!

more later...govttrader out

Catching The Next Swing In Stocks vs Bonds

Today US Treasuries rallied at the same time as stocks (note for newbies...this isn't supposed to happen).  On our stocks vs bonds model (see last weeks post) 10yr yields reached 12.5bps rich vs stocks (1bp richer than month-end).  While I expect bonds to outperform in the 2nd half of December, this next week should see a pullback from this exuberant level as we approach the 10yr and 30yr auctions next week.  For these reasons, I sold 10yr notes @ 100-11, ZN @ 133-26 and ES @ 1413 all at a ratio of 2 ES contracts vs 1mm 10yr notes and 11 ZN contracts.  These levels equate to 10yr yields 12.5bps rich vs stocks (so, i'm short all 3 securities).

More updates and conversation on this trade and the markets on twitter...so join the fun.

govttrader out..

Can We Catch The Next Swing In Stocks vs Bonds?

Last week i talked about how to view the correlation trading behavior of stocks (ES) vs bonds (10yr yields).  I mentioned last week how 10yr yields tend to richen vs stocks, typically over the last 3-10 days of the month. 

We have seen this take place since the Friday after Thanksgiving (perfectly within our window), and would not dare attempting to fade this move until after month-end is over, which means Friday afternoon at the earliest.

The month-end richening of bonds vs stocks has been more predictable than the mid-month long-end auction related cheapening, and the fiscal cliff drama will most likely exacerbate market volatility over the next month.  Nevertheless, it doesn't hurt to watch this spread like a hawk and try to catch the next turn (and yes, i am assuming there will be a turn, if only short-lived post month-end).

stay tuned for more on this relationship via twitter...govttrader out

Is The Bond Market Just Filling In The Gap?

Will the market spend 6-7 days filling in this current region?  Stranger things have happened.

And putting the last 4 days of profile in context....it does appear that we are filling in the gap left by the strong 30yr bond auction.

more later....govttrader out

Market Profile Premise - There Is A Battle And The Shorts Are In The Lead

Last Tuesday there was a ZN seller from 133-24+ --> 133-19+
Market then traded down to 133-09 and went sideways for 3 low volume days
Monday there was a decent volume ZN buyer from 133-19 --> 133-22+, after which the market returned to 133-17+.

The market has spent the majority of its time today (both before and after the buying) around 133-17+.  Though not very dramatic, I would call that a small "face" to the buyer.  While it is possible that the buyer was actually short covering and not a fresh buyer, I'm not inclined to think so.  With Monday's buyer positioned @ 133-21+ (avg price of buys), and the seller positioned @ 133-23 (avg price of sales), the distance between these 2 traders is small, and yet the seller still seems in control (market has not been able to stay above the buyers price).  While we can't know who will ultimately win out, we will know when it happens.  Either there will be a long liquidation event, or there will be a short covering event.  Both are predicated on pain and commitment, and both will be violent.

While I still believe there will be an attempt for a UST rally for month-end, that may not happen until Thursday / Friday.  In the meantime, we have what seems to be 2 large traders battling it out.

More later...govttrader out

This Week Is 30yr UST Buying Heavy - 10/30 Curve Should Flatten

In a world where flow is the new QE, this week is an alignment of the stars for long end UST traders.  Not only is this the week that the long end tends to outperform due to the month-end index extension (estimated @ +0.07 which is average for a refunding month), but this week has 4 long-end Fed buybacks via twist POMO.  I normally don't take positions overnight or over multi-day periods, but last week and this week are exceptions.  When the 10/30 curve was hanging above 115 last week, that was a gift.  The combination of month-end buying for the index extension this week (real money scheduled customer flow buying combined with program front-running activity) combined with the Fed's unusual activity this week (4 long-end buybacks..that's almost every day and includes extension day) and it should take an act of congress (literally...such as a fiscal cliff resolve) to keep the long end from outperforming this week.  I've been in the 10/30 flattener trade since 115.3 on Nov 20 (very small daily negative carry...but almost zero).  I expect there to be a good push at some point this week to below 112 to provide an exit.  Any steepening moments this week are to be faded.

On the outright market front, UST has outperformed stocks today by 4 bps (stocks are surprisingly unch).

 The UST seller from Tuesday Nov 20 is just about @ breakeven.  If ZNZ2 gets above 133-24, i expect there to be some short-covering activity in the market.

(note for TD thinkorswim users...the generic contract ticker for /ZN and the other long-dated UST futures contracts were rolled early in the software...i suggest sticking with /ZNZ2 until the end of the week to see where the volume is trading)

govttrader out...more later on twitter