On any other 30yr auction day, i would be selling 30yr bonds right here (9am in NY) (30yr bond yield @ 3.79% and UB futures @ 140-21 both higher in price by 4 basis points on the day) in anticipation of the 16bln 30yr bonds (32bln 10yr equivalents) to be auctioned in 4 hours.
[9](pictures 30yr UB bond futures vs inverse DX)
However, today is not any other day. Unemployment claims are slightly up...more than expected, labor productivity is up, and unit labor costs are down. All of these point to no desire to increase hiring. That is bad for the consumer (because the consumer is labor), and hence bullish for bonds. These numbers ought to also be bearish for stocks (a weaker consumer does not increase spending)...but it seems the QE fever is still keeping S&P futures high before the open. In a world where more QE = higher stock prices...Yellen's prepared remarks released yesterday made no mention of taper, and were highly supportive of QE continuation (though she did not explicitly state that). The remarks were vague, but erred on the side of continuing current accommodative policy (so, QE-4-ever).
This causes a conundrum. Regardless of Yellen's testimony and Q&A session this morning, there will still be a 30yr bond auction at 1pm (ET). Given the strength and low volume yesterday, and the current bullish tone of the bond market (4bps stronger from yesterdays closes) the bond market does not feel like there is a significant setup of short 30yr positions. This must take place before the auction. Primary dealers must each bid for their pro-rata share of the auction (so about 800mm each). No dealer wants to come out of a 30yr bond auction long 800mm 30yr bonds...its just too much risk in a world where directional risk is shunned.
This is the backdrop in the minds of bond traders as we approach Yellen's testimony and Q&A session. We will be reacting to her testimony with this in mind. However...to be clear...if she does not indicate a desire to extend QE (either in fact, or by indicating a lower unemployment threshold) then there should be good selliing of 30yr bonds to setup for the 1pm 30yr bond auction.
Typically, bond traders want to come out of the 30yr bond auction long bonds...but typically that occurs from a very low price, as the market usually sells off going into the auction. Today that is not the case (so far). I expect today to have unusually high volatility in the bond market....but we will just have to wait and see.
I'll be active on twitter [10]today...so feel free to join in the conversation.