10yr Auction Post Mortem + 30yr Auction Thoughts

govttrader's picture

Today the US Treasury auctioned 21bln 10yr notes (re-opened the Nov-2023 issue).

Going into today's 10yr auction, ever since the NFP number at 8:30am on last Friday, the US treasury market has been in short covering mode.  There was a markets survey that indicated the active trading participants in the treasury market were extremely short (by over 30% which is huge) a full week before the NFP data was released, and the short position continued to build as we approached NFP.  The NFP number was strong (+200k jobs) and so the mkt immediately repriced lower as you would expect.  However, the important piece of information was not the NFP number...no, the important information was the mkt's aggregate position (very short going in), because in the end, it is positioning that drives trading activity.  So, what would you expect this large community of shorts to do after the market dropped in their favor because of the strong NFP data?  If you said "cover their short by buying the market," then you would be correct. 

Normally (in the past), this type of short covering event would take place in a single day.  However, because this net short position took multiple days to develop (since Dec-1), and was so widespread (not only was the short position large in size...but it was large in the number of participants that were involved), the following short covering rally has taken a full 4 days to work thru the market.  I can say with confidence that now, that large short position has mostly been covered.  This does not mean the market is long...this just means that the market no longer has an embedded short position that needs to buy to cover.  

From all our lessons on market behavior, we know that when the last short covers (is done buying) the market stops going up (no more buying) and falls back down to around where it all started.  I think we've just about seen that.

So, the question to ask is "now what?"

Tomorrow we have the 30yr bond auction, and next week the 2yr, 5yr and 7yr auctions.  So, the market will need to reset those shorts to absorb the upcoming supply.

I could say a bunch of other fluff to fill space, but that really is all there is to it.  The mkt must have a certain amount of short position embedded to make room to buy the supply (auctions), and so, i expect a pop in the market to be sold to facilitate that supply process.  If the market does not "pop," thereby not enabling the market to get short again, then i expect last minute setup selling, and perhaps another tail in the 30yr auction tomorrow.

That's about all the strategy I have for now.  Levels will be available on the private twitter stream.






10:30am update - the treasury market is getting flambeyed this morning (heavy selling all across the curve) as comments from Fisher regarding forward guidance are scaring away market participants who have been hiding in the front end.

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govttrader's picture

So the bond market has started the setup selling for the 30yr auction today (coming @ 1pm in 3 hours)...i expect more setup selling to come between now and the auction.

maskone909's picture

good stuff keep it coming.  dont mind the bitter ex-traders here. 

fonzannoon's picture

the smart money is going to start the year off short USt's. at some point early next year we will be pushing through 3.25%

The Shootist's picture

Don't mention closing rate in post mortem? Not helpful.

govttrader's picture

The wi 10yr note was trading 2.815% at 1pm going into the auction, and the auction came @ 2.824% (0.9bps tail).  This was a small tail (its called a tail when the auction prices cheaper than the secondary mkt price), but the message was loud and clear.  Market prices were at the high end of the day going into the auction as everybody expected the auction to have strong demand (from the short-covering), but that did not happen.  The auction marked the end of the short covering...which is why the market sold of immediatly after the auction. Currently trading 2.86% (which is where the market sold off to after the 10yr auction...we have not moved much since the post-auction selloff).

MFLTucson's picture

The media will make up whatever story the Jewish bankers tell them to write!  Reliving Germany 1930's Wiemar.

wisehiney's picture

Thanks for the analysis. Worked like a charm.

uncle_vito's picture

What a bunch of BS.

govttrader's picture

if anybody has a different explanation for why the market behaved the way it did today...i'm all ears...

Tinky's picture

A butterfly in Uruguay got a contact high during a decriminalization celebration, flapped its wings faster than usual, and, well, connect the dots...

disabledvet's picture

There was another UFO sighting at Area 52 (the "new Area 51" apparently.) War with the Russians imminent. Hedge accordingly.

LawsofPhysics's picture

Don't try to manipulate the market, just try to recognize that there is no "market" Neo.