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

govttrader's picture

In a world where flow is the new QE, this week is an alignment of the stars for long end US treasury 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

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WhiteNight123129's picture

Now let us adress Japan. I have read balance sheet recession, and until only recently the exercise WAS NOT money printing but moving corporate onto Governement´s balance sheet, with little intervention from BOJ, check the numbers until mid 2005, AND PLEASE READ KOO.

I am not saying I am a Keynesian, I am saying that Japan was a massive Keynesian experiment with littel printing until the last 5 years.

Second Japan is funded internally, not externally. The crisis moment happen when the incremental buying stops, and in that case we have external buying from China for Treasuries or internal buying from consumers in Japan.

If you check Napier on China accumulation of Treasuries, what he says is that it is tapped off, they are stopping vendor financing and that is why you have a massive ballooning of Treasuries on teh Fed´s balance sheet. To that extent, from a money market analysis it makes sense to unclog money market from by either written off the bad assets (the right way) or removing them from the money market and repo plumbing by expanding the Fed balance sheet (the wrong way).

However it makes no sense to " stimulate" the economy by flattening the curve, no sense whatsoever. So indeed between the stop of accumulation of Treasuries by Chinese and the nonsensical statement that buying treasuries and flatening curve is stimulative, when you notice that COmmodities exchange are accepting all in a short period Gold as collateral and when you look at negative Swap spread you connect the dots: The Fed is fucking monetizing the crap. Short the crap.



Ned Zeppelin's picture

And the crap to short is . . . . ?

WhiteNight123129's picture

Treasuries. The price might go up, but the value goes down nonetheless at the same time... this has a name, it is called money illusion.


Orly's picture

I thought it was "wealth effect."


P.S.  Thanks for talking. I am trying to learn as much about bonds as I can as it seems you guys see what's really going on in the world.  'Preciate it.

P.P.S.  Can you recommend any books or people that can help me along?  Thanks.

Venerability's picture

And I still say if "Arafat was Murdered" is announced Wednesday or Thursday morning - with the key Palestine vote at the UN on Friday morning - the DOGs are going to have a very hard time burying either Brent or Gold under the by-rote ton of bricks this time.

Note that there is now a news blackout on the exhumation in Gaza itself and possibly in Jordan.

But there have already been what might be called pre-riots in unlikely places like Morocco.

Also note that Ehud Barak announced he will be leaving politics after the Israeli election. (I understand Sarah Palin is being touted to replace him.)

Orly's picture

Polonium half-life decayed many, many moons ago, so, of course, he wasn't murdered.


govttrader's picture

WhiteNight...i agree that fundamentally (and simply)...QE devalues the currency...and comparing the US to the Weimar regime is sexy...but ignores the more recent example of Japan.   According to the most recent Japan example (the lost decade or 2), the US situation of a healthy and diverse economic mix can go on for years.  In the meantime, there is plenty of day-trading to be done.

WhiteNight123129's picture

The advantage that the guys coming from Equity and banking like me and realizing that the financial assets can not be cheap when debt to circulation ratio (debt to GDP) is way to high. Then you realize that real assets (directly connected to circulation Gold and commodities) are still undervalued in relative terms to financial assets (since debt= financial asset for someone else). You need to have a proper historical context which is that Sov Bonds are very low yiled when the country is insolvent. If you are long Gold, you should short Treasuries to help your trade because if many people short Treasuries while they are long Gold it would force the FEd to print more and more and potentially force the Fed to issue Fed backed debt as collateral for commodities. That would be door to hyperinflation or the Fed force to stop printing. To open the door to hyperinflation or take away the printing press you have to remove Treasuries from eligible collateral repo. To that extent you will have noticed that commodities exchange have accepted gold as Collateral very recently precisely in case Treasuries are not working as repoed instrument to get cash for commodities trading to post margin (the piece from Sibilieau is instructive). THat is the 'what if' insurance, because without commodities market the whole work is fucked. We can afford closing stock markets, but not commodities market or we have no food. So that is what the Gold as colalteral for commodities market is adressing, and why all commodities market have accepted this collateral.

I think the negative US Swap spreads 30 Years reflects that view as well. The two together (Gold as collateral for commodities) while US Swap spread negative combined with the actual solvency metric are an interesting thing. Now I refer you to Drukenmiller article 15th of March 2011 WSJ.

To come back to the point of Equities guy like me who went over a complete reformation is that .

1. Never risk long term loss for short term gain (understand if there is value in the asset, and if equities have little at the current level while interest rates are negative in real term, long dated Treasuries are utter crap fundamentally, at that rate you will only be able to buy a fraction of a consumption basket in 30 years re-investing coupon versus the cash you pay to acquire those bonds and if you acquire the commodities today and store them (if you buy farm land that is bit equivalent).


2. Where is the crowd? (given that there is 10 billion of Silver investable a year and a massive flow from retail in bonds -- see Kaletsky flow of retail in bonds--, I think you are trading with the crowd.

3. Don´t buy the Fed put, Central Banks can blow up (1825 BoE, 1839 BoE were very close). Check if the CHinese want to do vendor financing (Napier)

4. If you hold PM you are shooting in your foot by buying long Treasuries. If on an aggregate basis long Precious metals short treasuries, you will see the real fireworks on your PM.

5. The Value guy has one definitive feature. He can tolerate a huge amount of pain if he knows the asset has value, the short Equity is even more heroic. He needs to endure massive pain by being kicked in the balls, or he has the iron cover to protect the kicking. And the asset which is the Iron cover is Gold. As long as the Fed buys treasuries, you get kicked in the balls with your shorts, but as long as money is printed the Gold is your balls cover. Never look at the short without the long context.

6. Finally commit little on the short, so that as you get kicked in hte balls harder and feel miserable, as long as the fundamentals are still in place you keep spitting in the face of your torturer who kicks you in the ball (but your Gold get stronger as the Fed prints).  Eventually, if you are right on teh fundamentals are correct, your torturer is scared away and exits in panic and you win.

Why would I pass on borrowing at 2.85% to invest in a farm giving me 5-6%? Because maybe I could borrow at 2.5% later? If that happens I will borrow more at that point cheaper.






Ned Zeppelin's picture

please translate this via Google

WhiteNight123129's picture

Je vais tenter la prochaine fois. Il semblera que mon choix d expressions imagees soit peut-etre intraduisible....

odatruf's picture

It is LOL, but that doens't make him wrong.


WhiteNight123129's picture

Short the Treasuries and long Gold. Either goes bankrupt or prints to infinity (long side) or reflates and stops printing (short side).

Buying treasuries is like buy Nasdaq in 1999 madly risky with limited upside. Short and hold the short.

People in Weimar were borrowing Mark to buy Gold-backed currencies, it would be self-reinforcing to the point of breaking the currency. Since buying Treasuries is lending to the US Gov, shorting is borrowing from the US Gov at a very low locked rate. IF the Fed wants to deter the shorts it has to print but that would push Gold up giving more margin to short and forcing the Fed to print more and so on and so forth.

If the market does that it can actually cornered the Fed. But right now people play the Fed game. If the entire market was long Gold short treasuries, it would take the printing press out of the hands of Bernanke.

So you go long the real monetary standard, and you go short the fake one (the asset backing the USD, which is treasuries). The trade is not buy Silver and short PJM, but buy Gold and short Treasuries.


magne13's picture

White NIght, you are correct fundamentally that trade will do the best over the next 20 years. It will be self fulfilling as obviously debts to the FED do not matter, nor does the increasing debt position of our country.  At least not this second, however once interest payments exceed tax revenue, which they never will as long as the FED still issues our money then we will see the end of the dollar, however it is notable that at current rates 1.7% on gov debt and going lower, it will take a debt level of over $40 TRN to get to that breaking point, the FED knows this and this is why the fiscal cliff is truly irrelevant to them, the only thing that matters in debt is the interest payments. That is how they think, that is not how I think, but that is how they think, however as you can see what this does is that it creates a gigantic welfare class fully dependent upon the government, this is not just happening here, but everywhere. I do think the end is near for our current monetary system and white knight is right, short Treasuries, Long Gold, it is self fulfilling....

WhiteNight123129's picture

Well it does not take $40 Trillion, it just take China to sell the treasuries they get against the trade surplus and buy Gold. Do like the PoBC, or Jim Rogers. Either the Gov gets its act together (and so you have short consumption stocks in the US, or gov spending stocks), or it does not and Fed keeps printing (long Gold), or the situation is so bad on inflation that teh Fed capitulates (short treasuries - Short Consumption stocks) and long commodities against it.

As far as when? Drukenmiller says it is very close.


Napier says that the reason interest rates we so low was because of hte Chinese flow until 2007, now it is the central bank flow but that means Gold up.

If people buy treasuries, the Fed does not need to print and so Gold does not rise that much. Help your PM trade, sell your treasuries buy more Gold and short a bit of treasuries.



Mr Lennon Hendrix's picture

Day trading bonds now?


Keep it up ZH, keep it right up.

vast-dom's picture

QE is Flow and Flow is QE. nothing new about any of it. nice try.