Gleacher On The 10 Year's 2% Handle, QE6, And How The US Treasury Wins Again And Everyone Else Loses

Tyler Durden's picture

From Gleacher's co-head of rates, Russ Certo

I don't know from what level but I have a strong sense that the 10 year note will have a 2% handle in the coming days/week.  It may be extremely difficult to get long bumping up at 200 day moving avgs, in the midst of supply (5yr note auction just came 1.7 bps through 1pm levels.) and we have $35 billion 5yr equivelants in the form of a 7 year auction tomorrow.  We also have ANOTHER refunding announcement right after the long weekend for more 3yrs, 10yrs, and 30s to be auctioned shortly we get back from the holiday Hampton hedge.  

But supply meets DEMAND.  The bid/cover oddly enough for the 5yr note was 3.2x and while bumping up at the high end of the range.  The last time this statistic bid/ cover was this high was in August of 1994 and the issue sizes were a mere $11 billion.  At the time that would imply $35 billion in bids for the paper.  When you extrapolate for today's $35 billion 5yr, the 3.2x cover implies bids for over $112 billion.  

Who needed to buy $112 billion 5 years near  new range break out low yield prints?  And who would pay 1.7 bps through in order to do so?   I think it is obvious that there is "official" demand in the form of central banks and official institutions, pensions, excess reserve banking entities recirculating monies and the like.  I feel goosed.  Seems like we are on QE6, they just didn't tell you that it started.  And we have seen this before. 

Coupled with long holiday weekends and  month end to follow (extensions below), I think investors (and the street) are on the defensive.  These nominal rates are mis-priced but sometimes logic can be your downfall.  To me, 3% 10 year yield becomes a self fulfilling prophesy when dealer/traders successfully defend the high end of the range 5 times or so {gt10 govt gip20<go>}.  So, the optics are painful but this market is on a search and destroy mission and policy makers appear to want lower rates.    

Speaking of such, last time mortgage rates were here, there was 40% greater refinancing activity.  Pushing on string laws of diminishing marginal returns (low rates, QE2s, whatever) seem like an effort in futility if you look at refinancings. 

Fundamentals?  Economic activity is mixed at best too.  Maybe this "crowding out" of rates by central banks and other official institutions is really about international banking. 

Maybe, the severity of the litany of unintended consequences of this low rate coordinated policy ( coordinated policy used to mean coordinated rate cuts or FX intervention but now coordinated means under the table excess reserve "asset" purchases) which is penalizing savers, reducing income based consumption, creating more leverage and robbing economic fundamentals from the future and the like, are more beneficial than the alternative of stakeholders perceptions how bad banking balance sheets are.  Maybe, if you don't have sound financial institutions (or the perceptions of such) or sovereignties, both of which need a function of time, lower rates, higher net interest margin, to work their way out of insolvency, then all this is worth it.  Maybe, solvency conditions of banks explain this seemingly confusing relentless easings of polcy.  No sound banking system, nothing sound. 

Like how bad level 3 assets, total real estate exposures, second liens, phantom accounting and tier 1 ratios, regulator attack on bank revenue models.  Maybe engineering this rate structure is worth it in the eyes of policy makers despite all of the adverse alternative consequencesMaybe, the policy community has a different philosophy.  They always do and recall when Geithner at previous NY Fed under Greenspan regime and Congress incessant push for housing formation and other exposures.  And the previous bouts with over leverage and government and private sector exposuresMaybe, $100 billion plus bidders powers to be find the low rate structure is worth the risk.  Chalk it up to another win for the US Treasury and a loss for the dealer partner primary counterparts.  Can't wait for the 7yr and sub 3% 10yr.