Reading The Bond Market Price Action Post-NFP

govttrader's picture

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 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 as i write this...and the ECB wants to cut rates...yikes can this spread continue to widen??  Its already moved 10 bps this week!!

more later on the blog
...govttrader out

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govttrader's picture

Also, in general, the UST market follows the Bund market more during London hours before the NY crowd comes in (makes sense since Europeans tend to trade European markets).  During NY hours when things are busy there is a degree of correlation on some days...but its not consistent and therefore difficult to model and trade that "spread" on an intraday basis.  The large traders (the ones that matter) who trade the US vs German spread are not active in this spread everyday...hence why its not the best trading vehicle...just something to be aware of.

magne13's picture

Govtrader, dont look too much into positioning, econ numbers are well prepared for and barring some far off surprise are used to exit positions already built up.  Bonds and tens for that matter will not see much of a concession into auctions next week, far too much external risk out there right now.  No need for a concession when you have the FED flip buy back program.  Anyway these yields if pushed any higher should be used to get long call structures in tens because if you think for one minute the FED can take the buyback program off in the long end you are mistaken.  secondly rich to stocks, that all depends on your time frame. I like your analysis though, good work.

govttrader's picture

Measuring rich / cheap vs stocks is cyclical on a monthly basis.  If you look at the last 6 months you will see a clear pattern.  There is a graph on my blog here.

govttrader's picture

The Germans don't have 47bln 10yr equivalents in auctions next week...the US does.

Orly's picture

Right, but my point is that they could have been front-running any disappointment in the Fed announcement.  The Pound also was run up this week in anticipation of something going to happen, on even more dismal news out of the UK, except to say that the BoE may have to use more QE in the near future.

The Treasury auctions are Tuesday and Wednesday, correct?  Does the Tuesday auction happen before the Fed announcement or afterwards?  What do you see them saying?  Will they buy MBS or something else, since Wells and JPM have already said that their mortgage originations aren't going to be getting a lower rate and they'll just pocket the extra margin?

govttrader's picture

The 10yr auction is wednesday...the 30yr is thursday.  The market expects ~40bln /month in flow of additional QE purchases from the FOMC statement.  Anything more than 10bln left or right of that amount will be a surprise and the mkt will react accordingly.

Orly's picture

My bet is that the Germans are front-running a disappointing Fed release next Tuesday.  If Dr. Bernanke comes out and says that there is no more free money or less of it than the market anticipated or that the Fed will absorb other paper besides MBS from the giant banks, then stocks will tank, leaving the door wide open for further appreciation in US Treasuries.

Maybe they know something that we don't know.


CunnyFunt's picture

That sounds plausible. I think the equities "market" will be disappointed with the Fed. Nobody wants to break with the party line of "recovery".

Mutatto's picture

".......on closer examination."   eh eh.  THAT's a good one.