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US Treasury 30yr Auction Post-Mortem
Today the treasury auctioned off 16bln 30yr bonds at 1pm (ET). This occurred during a fairly volatile backdrop. Janet Yellen was answering questions from the Senate for much of the "setup" period. Her testimony was fairly QE - supportive, and so the bond market rallied during her entire testimony. Then we had a 3.5bln 10yr POMO @ 11am (ET) 2 hours before the auction. This was the pre-auction crescendo that many day traders are familiar with.
Bonds rallied right into the 20minute period after the 10yr POMO in a crescendo of volume....and then fell back down to the overnight VWAP after the 1pm 30yr auction tailed 1.5 basis points.
(pictured are 30yr UB futures vs inverse DX futures)
I suggested selling bonds at 11:20am this morning into the crescendo of volume, and covering after the auction. As a trader, i couldn't really think of anything else to do.
Up until the 10yr POMO, the 10/30 curve was stable at 108 basis points. This indicated that a concentrated short setup had not taken place. However, after 11:20am, 30yr bonds started to underperform (both outright price and on the curve), indicating that the setup (selling bonds pre-auction) had begun. I thought the timing of this setup selling very coincidental.
While the treasury market is still generally strong post-auction (the belly inparticular), the fact that the 30yr auction tailed indicates that the large short base pre-Yellen speech release has mostly covered and the market should be fairly stable in the current price range.
(UST yield change on day)
Typically, the treasury market builds a concession pre-auction, and actual investors of US Treasury paper buy these auctions to get long. Today that is a scary trade (getting long) because the market has repriced higher after Yellen's early-release speech last night.
As a day trader, i won't participate in that trade...but as a portfolio manager, i'm sure that many are.
With Janet Yellen at the helm, its clear that the economy will need to clearly demonstrate deep economic strength before she will consider reducing QE...and that may be a long time away.
If you are interested in this type of bond market commentary intraday, in addition to following along with the trades that i am doing in the market, then i suggest trying out my paypal subscription twitter feed.
-GovtTrader
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hey the sidelines is not to bad a place to be- yea boring but ok. if it seems complicated you are obviously missing something.
massive printing in many currencies and buying accross the board plus suportive bid by the fed. which will give first. well when all these fuckers conspire together there is no failure, unless at some point in time there is no honor amoung theives. but since the thieves steal from the majority, there is plenty to take. when the mid class is exhausted then we shall aproach the end game of theivery...
it's tempting to subscribe because i am truly confounded...not by being wrong (that never surprises me) but by simply not understanding in the least what QE is/why it has/has had the impact it has/what it means going forward. part of me says "don't be a dope...this is so massively inflationary it's going to make Weimar look like a picnic." And another part of me says...well, i guess "this is really going to make Weimar look like a picnic." Karl Marx (of all people) still remains my lodestar: "the internal contradictions." they're readily apparent for all eyes to see...why doesn't the bond market see it and "collapse"? Quite honestly i haven't a clue. I never should have thrown the towel in on equities in the first place and that's never a good sign. it's an ugly world out there..."brutish, nasty, short." normally that's a perfect environment for investing in treasuries actually...
I agree that my gut reaction to QE is the Weimar example. However, Japan has been engaged in this type of behavior for years, and while they are still experiencing their "lost decade," they have not had the Weimar experience. The key is the banks. So long as the banks don't lend out all those excess reserves, most of the newly printed currency never makes it into circulation. This really is the key...bank lending..because that is where the public experiences money creation. So long as banks refuse to increase lending, all QE does is push investors out the credit curve. Banks are not lending because the Fed is paying IOER (interest on excess reserves). Its not a lot, but this IOER is guaranteed riskless return...so the banks choose it over making new loans. I imagine that the Fed and the heads of the banks had a meeting and agreed this would be the path they would take. So, when the Fed buys bonds, they are not simply creating a new long/short position (Fed long vs everybody else short). Instead, owners of the bonds are selling them to the Fed, and then collectively the previous UST owners are buying other assets (corporate bonds --> high yield bonds--> stocks). This is how QE pushes investors out the credit curve, and why most financial media refer to QE as propping up the stock market...because it actually is. So, when the Fed stops QE (whenever that may be) the process should reverse until market prices normalize. That would be the stock market drop that bears are waiting for.
This is a long term process. We market participants look every day for indications that the economy is picking up growth, in an attempt to determine when QE will end. A burst of economic growth could accellerate the start of taper. This is of course wishfull thinking (sortof), but that is part of the human condition. Until recently the general concensus for taper was 1st quarter of 2014, but Yellen's comments are pushing back that concensus to the latter half of 2014 (which essentially means we have no idea).