30yr UST Auction Post-Mortem
Today the treasury sold 13bln 30yr bonds (re-opened the Nov-2043 issue).
After yesterdays fireworks following the weak 10yr auction, tensions were high going into today's 30yr bond auction. Going into the auction, the 30yr bond had been outperforming on the curve all day (which is surprising on a 30yr bond auction day). The belly/front-end of the curve saw decent selling, but the 30yr did not (again, very surprising for a bond auction day).
Going into the auction, the wi 30yr ("wi" = "when issued" - which is what we call a bond before it is auctioned) was trading 3.89%. The 5yr and 7yr points on the curve were trading near the lows of the day (the 30yr bond was trading 97-18 @ 3.89%....and the low price pre-auction had been 97-12...so we went into the auction pretty close to the low). The auction priced 97-10+ @ 3.90% (so, a 1 basis point tail = 1bp cheaper than where the bonds were trading in the secondary market going into the auction).
(30yr UB bond futures vs inverse DX futures - the purple line)
Now, this is the exact same type of result that we saw at yesterdays 10yr auction (1bp tail) but the lead up to the auction was entirely different, and the price action post-auction is also completely different. Yesterday, the market rallied right into the auction and went in right near the day's high. Today, the mkt sold off pre-auction, and we went in close to the lows (the 30yr bond was strong on the curve...but outright price was still lower on the day - especially if you look at the belly of the curve). Yesterday, the auction tailed 1bp, and the mkt sold off like a banshee. Today, the auction tailed 1bp, and the mkt hasn't really gone anywhere...the mkt is going sideways in-between the auction stop price and the pre-auction price. This is VERY RARE for a 30yr auction. The result is almost always a big surprise one way or the other. I was saying before the auction that the entire mkt felt very weak, which indicated a tail was coming. Since i went into the auction short and was bidding to cover that short and get flat, i was hoping for a much larger than 1bp tail. The result of only a 1bp tail was a "meh" result (i still made a trading profit, but i was hoping for more). For a 30yr bond auction, i would consider a 1bp tail a practically "screws" result...and that explains why the mkt is just chopping sideways since the auction..this means the mkt was perfectly positioned, everybody is happy and nobody exited the auction with too many or too few bonds from the result.
If you are wondering "what next?" Well, next week the US treasury is auctioning 2yr, 5yr and 7yr notes. This is unusual (these auctions typically take place in the last week of the month) but the holiday calendar has pushed things up. This may partially explain the weakness in the 2-7yr part of the yield curve. Also of concern to the belly and front-end of the curve is the article recently published in the NY times talking about Fisher's views of forward guidance. His comments on forward guidance were very "indecisive" regarding the front end of the curve, where the mkt has experienced and was expecting the more reliable "lower for longer" mantra. This combined with the auctions next week are both reasons for the front end of the curve to sell-off...and so it has. There are significant sums of money invested in the front of the US treasury curve for carry and roll-down, so these developments and next weeks FOMC meeting wil be very important, as is usual.
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