Thursday, November 13, 2008

30-year auction: They're just not in demand anymore

The 30-year auction was... something less than good. You don't need to hear any of the auction statistics (which can be deceiving, don't trust them). Just look at the trading action. See if you can guess when the auction was held...

The subsequent large rally in stocks didn't help and left the 30-year down 3 points on the day. For most of the day the 10-year held in until stocks really got going, and is now down more than a point.

I'm positive you'll see a bunch of media yakers claim that this is evidence that no one wants U.S. bonds. Bullshit. If that's true why is the 2-year threatening to break 1%?

The reality is that even the U.S. Treasury isn't immune from the deleveraging contagion. The Treasury used to be able to count on primary dealers to take down all their bonds. Dealers are crunched for capital. Plus what capital they have isn't getting committed to low margin business like inventorying Treasuries.

Look for this Treasury supply to get digested over the next 5 trading days, and the 30-year will be right back in the 4.15% area.


kristof said...

Perhaps the current demand for short term government debt is driven by the need for somewhere safe to park money until the bottom (TM).

No one (yet) is expecting the mess to last more than 2 years, it makes sense to keep it short term if you don't really want to expose yourself to interest rate risk.

I think there's a couple more shoes left to drop:

- "too-big-to-fail" country to blow up. The UK seems like a good candidate.

- some major municipal or state financial failures.

plexist said...

Interesting post. Looking at swap spreads for the US 30 year also shows some interesting things: it's now negative!

To check the supply/demand hypothesis, it would be interesting to compare the total outstanding debt in 10-year vs. 30-year. Does anyone know where to look for such information?

scott said...

id bet you could get a bloomberg helper to find total outstanding nominal amounts of 10 year and 30 year debt.

Accrued Interest said...

Its right there on the Bloomberg DES page. If you defined what constituted "10" and "30" years (because looking at just the current on the run wouldn't make much sense), it would be easy analysis.

PNL4LYFE said...

The best bberg function I know to look at this is DDIS. Works for corporates too.

CT10 [Govt] DDIS [Go]

This chart clearly shows what many people do not realize; the government's obligations are massively concentrated in the front end.