US Treasury Market Distributing Higher Today Indicates Leveraged Supply Imbalance

govttrader's picture

For all those traders scratching their heads, wondering why the treasury market is rallying in front of the big 01 auctions, this blog post is for you.

All that excitement I had earlier this morning, talking about selling a POMO induced pop...and nothing.  The market has been coiling near the POMO related high print (99-17 on 10yr notes...133-06 on ZN @ POMO results).  I was waiting for 133-11 on ZN to sell the mkt, which is about 99-23 on 10yr notes.  I believe (because my model says so) that if the market were to trade up to those prices, we would see heavy selling, taking us back down and thru 132-27 on ZN.  Unfortunately, the market was stubborn today and has been sitting here in the 133-02+ --> 133-06+ range for the past few hours (that's only 4 ticks....a trading range on the order of 12 ticks is more normal).  Trading volumes today are very light (70% of normal for this time of day).

In my first instinct, I see 2 comments on the trading activity today.  First, volumes are light, and price volatility low.  Second, the market seems to be coiling around this new higher price zone today.

While the market has NOT been making intraday higher HAS been making intraday higher lows.  So, looking back at the price action from Friday post NFP, we find a pattern that we've identified in the past.  In the 30 minutes post NFP announcement, over 180k ZN contracts traded between 132-10 (the low print and consequently the bottom of the weekly bell curve) and 132-15, followed by vertical trading up to 132-27 (12-14 ticks of vertical price movement) followed by sideways-ish activity for several hours.  Then, at the London open this morning, the market distributed (moved on low volume) from 132-27 --> 133-04+.


Normally, our model says that when over 100k ZN contracts trade in a small price/time region at the outer edge of the bell curve, followed by vertical price action..followed by sideways activity (also referred to as a "P up")...we must beware an undersupply condition (a newly initiated short term trend). Today's price action seems to be indicative of this exact pattern.  So, we have a 1st P up, followed by sideways activity, followed by a supply distribution...followed by sideways activity.  The large buyer from avg price 132-14 has most likely not had an opportunity to exit his position (he needs to sell into a high volume rally because his position is so large).  This is why the 133-11 price target was the natural location to sell today.

However, at current price / time, most of the "original liquidity providers" have taken their losses and turned over their positions to fresh shorts (lots of small capitulation trades - hence the supply distribution followed by sideways activity making higher lows).  Since we "missed the boat" with regards to the original supply imbalance, the only thing to do now is wait and watch the market for signs that the large buyer is exiting his position and handing off his long position to fresh weak hands.

To be clear, the 133-11 level is no longer a line in the sand to sell (though it is still a potential liquidation zone for Friday's large buyer..and thus a level to watch closely).  I'm going to wait and see what the large trader does and follow his footprints (that means i must wait for the large trader to start selling his position BEFORE i can sell the mkt).  This makes setting up for the upcoming auctions particularly difficult for the concession trade.  So long as the new large buyer (who is levered) withholds his paper from the market, the market will have considerable difficulty moving to lower prices.

This is a large degree of control for one market participant to have over the treasury market, and yet here it is.


more later...govttrader out...

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Orly's picture

Why did the price fall off so abruptly on high volume?  And one trader came in and started buying everything in sight?  One can only wonder what this person knows or doesn't know...


Oh, that was liquidating positions before the weekend or something?

WhiteNight123129's picture

SHort and hold the Short....Goes higher? Short more, don´t be afraid by those paper pushers, if you have the right stock hedges and PM longs, they will just try to push on a rubber band, adjust the length of the rubber when they push too much in one direction. THey are cornered, check mate, game over, caput, provided you have the right mix of long commodities, short stocks long currencies, if they make something deviate something too much lean against it and do not be concentrated too much...

THe one bonds to own right now: Yuan Bonds!!! Bitchez






tok1's picture

that's great annalysis I hope you write again ...after election maybe..

vast-dom's picture

thx govttrader. when will these bubbles finally pop.....

MrBoompi's picture

I'm a college graduate and a longtime successful business owner, but I have to admit when you guys talk bonds it goes right over my head.



vix is for kids's picture

Don't be too impressed, Boompi.  These guys are just slinging the old BS, showing off their knowledge of the jargon.  Today's bond market action was absolutely nothing out of the ordinary.