Primary Dealers Net Treasury Long Positions Spike To 2010 Highs, Is There A Major Derisking Occurring In PD Portfolios?Submitted by Tyler Durden on 04/02/2010 22:55 -0500
The FRBNY has disclosed that Primary Dealer bond holdings have surged to 2010 highs, with net Coupon holdings of nearly $20 billion, and all Treasuries (including Bills) accounting for $36 billion. Contrast these holdings with the lows recorded in late January in which Coupons were a net short position of ($24) billion. Bills have also surged by $32 billion from ($15) billion on February 17, to $17 billion on March 24. Incidentally the accumulation has occurred even as recent Bill and Coupon auctions have been very week over the past two weeks. Are PDs becoming unable to offload auction allocations? After all this is capital that the Primary Dealers would much rather use to gun the stock market than be locked up in instruments yielding virtually nothing. Alternatively, if PDs are accumulating Treasuries, could this merely be an indication that they are reallocating capital away from equities and to USTs? Furthermore, Corporate bond holdings have dropped to near 2010 lows - is there a major shift away from risk (yes, that includes stocks) occurring under the surface? Altogether, PDs have spent $33 billion to cover shorts and accumulate fixed income instruments (including Agency and MBS) over the past month, and $60 billion Year To Date.
While the logic of how a US economy equates to a weaker dollar escapes those who think before pushing buttons and chasing trends, a glance at intraday currency performance indicate a substantial divergence in then Yen relative to the global "short-dollar" complex. Even as the euro, cable and OZ are powering higher, the yen has been caught in a weak zone, and has been declining all day long despite a stronger than expected US economy (yes, it does make sense...but don't think about it too hard). The oddity in the FX market is compounded when juxtaposed with Japan CDS levels: as of several minutes ago, Japan CDS was trading around 63 (white line on the chart below): a level last seen in April. This begs the question: what does someone know about Japan, and will this weakness translate into weaknesses for other non-US currencies?
It appears the market now only acts sensibly on big volume selloff days. The chart below is what one would expect, and what one would never see over the past 6 months.
Analyzing CDS open interest data since the March 6 lows demonstrates a troubling trend: there has been over half a trillion in net derisking across various industries, with financials leading the pack with over $130 billion. The global tightening in the CDS universes across all sectors is one direct consequence of this substantial shift to derisking.
Spreads were broadly wider in the US as all the indices deteriorated. Indices generally outperformed intrinsics (as we see high beta shorts selling index protection as hedges) with skews widening in general as IG's skew decompressed as the index beat intrinsics, HVOL outperformed but widened the skew, ExHVOL outperformed pushing the skew wider, XO's skew increased as the index outperformed, and HY's skew widened as it underperformed.