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Treasury Market Panic Reversal Due To Little Known Forces Called Supply and Demand

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Treasury Market Panic Reversal Due To Little Known Forces Called Supply and Demand

Courtesy of Lee Adler of the Wall Street Examiner

The Treasury market panic saw a bit of a reversal this week, partly due to an unexpected, large increase in supply because of a sharp drop in Federal tax revenues over the past couple of weeks, and partly due to the market misunderstanding of Thursday morning’s news. The “better than expected” weekly unemployment claims data was one thing. Some piling on the “risk on” trade as a result of news of a deal for another Greek bailout, was another. But we are more interested in the more esoteric and little known drivers of prices, such as “supply” and “demand.”

The short term knee-jerk reactions of hedge fund traders to news “don’t impress me much.” For one thing, today’s (2-9) news has a shelf life of about 20 seconds. Likewise, traders are prone to misinterpreting “news” depending on their currently predominant position.

Since the boat is loaded long Treasuries, any “good” economic news triggers a one day selloff. When those selloffs come within the bounds of a trading range, they’re nothing more than noise. To confirm a reversal in Treasuries we need a bona fide breakout. First, the 10 year yield needs to break 2.10, and then it needs to break 2.40. If that were to happen, it would signal a long term reversal. There are some signs that we’re headed there, but we’re not there yet. The jury is still considering the case.

In recent weeks the Treasury buying panic was helped by reduced supply, triggered by a massive bulge in withholding taxes from late December to late January. That bulge has now subsided, and the Treasury suddenly appears to be running short of cash. It made a surprise announcement today that it would need to raise a quick $20 billion in a 64 day CMB to be auctioned next week.

What had been the beneficial impact of reduced supply could reverse into greater than expected supply in the weeks ahead if tax revenues fall short of the government’s optimistic estimates. The daily withholding data shows those revenues dropping but then pausing over the last few days, so it’s not completely clear yet where that trend is headed. The data for the coming week should give us a better handle.

We’ll also keep an eye on the dollar. The dollar’s strength last year was primarily due to capital flight out of Europe. If the fears that drove those flows should ease, the dollar will weaken along with reduced demand for Treasuries. There have been hints of that in conjunction with the ECB’s giant Long Term Refi Operation (LTRO) on December 21. The next one is scheduled for February 29. I’ll also continue to review the flows associated with that in the Fed Report update this weekend.

 
Get regular updates the machinations of the Fed, Treasury, Primary Dealers and foreign central banks in the US market, in the Fed Report in the Professional Edition, Money Liquidity, and Real Estate Package. Click this link to try WSE’s Professional Edition risk free for 30 days!
 

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Sun, 02/12/2012 - 06:24 | 2150500 Mr_Wonderful
Mr_Wonderful's picture

The price of govt. debt is about 1% shy of a 100-year high. The yield of the 10-year note will most likely be pressed down as low as .5% eventually.

Sat, 02/11/2012 - 22:35 | 2150090 dcb
dcb's picture

tlt/tbt has been a great trade for me the past few weeks, nice descending channel, easy to trade. tbt 10% gain, reversal 5% gain treasuries, back and forth.nice and easy.

chart tlt, weekly draw the trend lines. good trading. we hit a mid point yestarday, which usually means a treasury loss monday, but a better chance to sell tbt. if you did get the chance friday. I think htis is the best trade going myself. I much prefer a nice steady channel than a break out anyday, because it's much harer to judge when to short the break out.  and they eventually always go back to trend.

Sat, 02/11/2012 - 22:20 | 2150057 Dermasolarapate...
Dermasolarapaterraphatrima's picture

"Supply and demand"...how quaint.

Reminds me of how my Grandmother traded using the now-amusing "fundamentals" strategy.

Sun, 02/12/2012 - 01:17 | 2150309 Boxed Merlot
Boxed Merlot's picture

Supply and demand"...how quaint.

 

The Bourne Supremacy

 

Last lines. 

 

 Jason Bourne: Get some rest, Pam. You look tired

 

 

Sat, 02/11/2012 - 22:14 | 2150051 HD
HD's picture

You don't need supply and demand anymore. All you need is supply and the Fed.

What could go wrong?

Sat, 02/11/2012 - 23:05 | 2150127 Ned Zeppelin
Ned Zeppelin's picture

Exactly - when demand falters, or exhausts itself simply because the supply overwhelms the legitimate market, the Fed will monetize the rest. And the day will when those who cry foul, be they bond vigilantes or anyone else - and they will then be crushed, one way or the other.  A cornered, heavily armed Empire is a dangerous beast.

In Cheney speak, why don't deficits matter? Because if you don't take FRNs for your oil, the Empire will take it by force. Play ball, or else. 

Sun, 02/12/2012 - 09:15 | 2150584 mind_imminst
mind_imminst's picture

Exactly (squared)! Any breakout/reverasl in bond prices will be met head on by the "printing press" of the FED. There is no limit to how much U.S. government debt the FED will buy. Don't get fooled by a "potential" breakout. Treasuries will bounce around in a range, but the yield is more likely to go lower than higher.

Sat, 02/11/2012 - 22:11 | 2150046 Hannibal
Hannibal's picture

“Civil disobedience is not our problem. Our problem is civil obedience. Our problem is that people all over the world have obeyed the dictates of the leaders of their government and have gone to war, millions killed because of this obedience. . . Our problem is that people are obedient all over the world in the face of poverty and starvation and stupidity, and war, and cruelty. Our problem is that people are obedient while the jails are full of petty thieves, and all the while the grand thieves are running the country. That’s our problem.” 

—Howard Zinn  

Sun, 02/12/2012 - 12:24 | 2150860 Quaderratic Probing
Quaderratic Probing's picture

Only takes 5% to turn the whole hurd .... the overloads know this

Sat, 02/11/2012 - 22:09 | 2150039 iamgogi
iamgogi's picture

yawn

Sat, 02/11/2012 - 22:06 | 2150033 falun bong
falun bong's picture

The long bond was up 50% last year...so now the dumb money coming in this year will get pawned

Sun, 02/12/2012 - 01:00 | 2150279 Richard Whitney
Richard Whitney's picture

Language alert: above comment contains World-of-Warcraft-coined-already-misspelled-meme-word spelling mistake. That is refers to 'dumb money' is a textbook example of irony.

Sun, 02/12/2012 - 01:38 | 2150344 Stack Trace
Stack Trace's picture

PWNED was used back in the Everquest days (long before WoW existed and therefore not coined there). The irony never ends.

Sat, 02/11/2012 - 21:47 | 2150005 non_anon
non_anon's picture

it's all greek to me

Sun, 02/12/2012 - 01:21 | 2150319 Boxed Merlot
Boxed Merlot's picture

What is alethia?  (Pilot)

 

 

 

Sat, 02/11/2012 - 21:45 | 2150002 Joseph Jones
Joseph Jones's picture

Hey, I'm the first poster!  Where are all you deadbeats? 

Does this mean I don't have to pay my March Zerohedge dues? 

Sat, 02/11/2012 - 22:25 | 2150069 sessinpo
sessinpo's picture

"Does this mean I don't have to pay my March Zerohedge dues? "

 

No, we increase your dues so that the deadbeats can post for free. But you can borrow that money with long term notes so that someone's grandkids will have to pay for it.

Sun, 02/12/2012 - 07:23 | 2150522 Dermasolarapate...
Dermasolarapaterraphatrima's picture

Don't pay. Just walk away.

Do NOT follow this link or you will be banned from the site!