Guest Post: Observations On Unusual Bond Deal Behavior

Tyler Durden's picture

Yves on unusual bond dealer behavior, submitted By Yves Lamoureux of Blackmont Capital

We keep hearing about a return to normalcy in financial affairs.
Spreads are back in line and risk appetite is healthy so we should all be feeling good.
I specialize in the behaviour of market participants. This week I am interested in pointing out the very unusual behavior of the 18 primary bond dealers in US Treasuries.

As indicated on the graph under A the trend of the 30 yrs Treasury does match with good correlation the buying and selling of the primary dealers.

Dealers  have been averaging a net short position of Treasuries  of  more than - $100 billion since late 2002. The 10 year average stands at over -$ 60 billion net short bonds.

At the point B we got to the most short position that dealers held at a record over -$ 190 billion net short bonds. It also corresponds to the high yield of 30 yr Treasuries at that time.

Point C is where it gets interesting as dealers go net long bonds.There is no doubt  that halfway in 2008 dealers reducing the net short to about -$ 25 billion (yellow line) was a precursor to the giant move up in the bond market toward the end of that year.

Point D shows a very rare long position at record of over $93 billion.

If fear is gone  you would expect primary bond dealers to reduce considerably the current holdings of bonds. Point E shows that it is not the case and hoarding in treasuries continue.The latest uptick shows a net long position at over $16 billion. A very rare and unusual behavior from bond dealers. We look for long term treasury prices to go unusually higher.

Yves Lamoureux, Investment Advisor, Blackmont Capital inc.

The opinions contained in this report are those of the author and are not necessarily those of Blackmont Capital Inc.. Every effort has been made to ensure that the contents of this document have been compiled or derived from sources believed to be reliable and contains information and opinions which are accurate and complete. However, neither the author nor BCI makes any representation or warranty, expressed or implied, in respect thereof, or takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. BCI is an independently owned subsidiary of CI Financial. CI Financial is a Canadian owned diversified wealth management firm, publicly traded on the TSX under the symbol CIX. Blackmont Capital Inc. is a member of CIPF and IIROC.

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Anonymous's picture

Well, it could also mean that the primary dealers were the ones buying up all paper in the Treasury auctions (since nobody else wanted to buy this stuff) and they need to unwind their positions.

Anonymous's picture

Dollar is going like a panic fall. if DXY is not turning up quick, what will happen? it goes to 72? is this how we get a big shake-up? everyone now is getting a quick finger, and they think they can get out before anyone else. Is this how we get a panic move or crash?

Anonymous's picture

Definitely worth noting

SDRII's picture

Interesting considering Bloomber was out this am with an article claiming the net short position I recall 16bn or so last week was an indication of the dealer community piling into riskier assets and using the Ts as short hedge. No mention of the sizable average historical net short position nor the reversion to net long 

Miles Kendig's picture

That should tell you everything you need to know if you know the flow

Anonymous's picture

like this gem:

"The two-month decline in net positions was interrupted last week, as net longs rose to $16.2 billion"

Anonymous's picture

See convexity hedging, or lack thereof on their MBS, agencies and other assorted interest rate derivatives that have been blown off or hidden on their books.

hardball22's picture

I think these dealers' Treasury holdings are an asset-side balance of the gratuitous liabilities taken-on from TARP and other injections.  In a fearful (to be sure) environment where deposits with the Fed carry a yield and banks' spreads are tacked off 50bps at the discount window, I doubt banks mind a negative spread on some liabilities.

ex. Banks take capital from TARP-esque injections (i.e. preferreds with dividends) and just park it in Treasuries (low yield). The negative IRR is peanuts compared to the downside potential & principle erosion that could result from yield chasing.

If that's the case, it just goes to show us how much gratuitous liquidity was rammed down banks' throats.

Gordon_Gekko's picture

LOL! Who would have though that the "flight to safety" really was just market manipulation (Aww come on, you don't think the Fed TOLD the PD's to go long treasuries?) and in reality, a "flight to trash". Like I said before, BOTH the Bond and Stock markets have been rigged and are therefore WRONG.