Friday, October 23, 2009

Don't get technical with me! 10/23/09

Say what you want to about next week, it will be interesting.

To start off, momentum remains solidly negative, although the bars show declining intra-day vol recently.

The 10-year is sitting on what I think is strong support at 3.48%.

Next week we get a ton of new auction supply. $7 billion in 5-year TIPS on Monday, $44 billion in 2-years on Tuesday, $41 billion in 5-years on Wednesday and $31 billion 7-years on Thursday.

I predict the auction results will be weak, especially for the 5 and 7-year bonds. Lately how well auctions have gone as been a function of whether foreign demand shows up in force or not. This isn't a comment about the long-term foreign demand for U.S. debt. Rather an observation that central bank demand in particular is notoriously fitful. They need bonds one week, they don't the next.

Last week saw very heavy buying from east Asia and Russia. I am willing to bet that will mean less demand at next week's auctions. In particular the 7-year, since I heard that was where they were buying.

Auctions don't guarantee lower bond prices. Here is a chart from the last 2-week Treasury auction binge (9/22-10/8). Yields basically moved straight down for the first week (the 2-5-7 year cycle) then were sideways for the second week (the 30-year was especially poor).

So one could make a case for a long here, maybe a good 2-year auction allows us to bounce off support at 3.48%. I'd think the next resistance would be around 3.30%, which is a level we've hit several times and also about equal to the 200D SMA.

So what's the play? I don't like an outright short right now. Especially given today's action. Sharply lower stock market with a lower Treasury market? Sets up for a big rally given even a modestly good auction. I view days like today as having latent Treasury demand.

Better to play this contrarion. Wait to see how the 2-year goes. If it goes well, look for an entry for a short and play it back to 3.48%. That would require a very tight stop. Or if it goes poorly as we break through 3.48%, then you ride that up to 3.71%, where I think the next resistance point is.

The other play is buy TIPS ahead of Monday's auction. Word on the street is that the primaries are begging the Treasury to issue more TIPS, but instead the Treasury decreased the size of the 5-year auction! I'm buying TIP here at $103.20 with a target of $104.28, stop at $102.85


GS751 said...

How much effect does the dollars movement have on the weekly auctions?

Salmo Trutta said...

The current market reminds me of the inflation and inflation expectations that traders obsessed about in the late 70's, i.e., leading up to the 1981 peak in yields.

The strategy back then was to only trade on the short side of the market. It made a lot of people millionaries.

Since both gasoline and grocery prices are moving up, bonds should move inversely. But any trade must have a safe entry point, one that incorporates both short-term and long-term interest rate movements.

For me if you don't have conviction in your analysis it's better to wait (even if it's a long time) for higher probabilities.

Anonymous said...

...So one could make a case for a long here, maybe a good 2-year auction allows us to bounce off support at 3.48%. I'd think the next resistance would be around 3.30%,........

.....if it goes poorly as we break through 3.48%, then you ride that up to 3.71%, where I think the next resistance point is.............

Either 3.3 is the resistance and 3.71 is support or
Either 3.71 is the resistance and 3.3 is support.

you can NOT have it both ways.

It is quite confusing if you mix up your discussions about yield and prices in the same article.

I will highly appreciate if you have more clarity in your thought process. and your communication skills.


Raphaël Kahan said...

Accrued Interest said...

Ha! I can have it both ways! No I agree. I need to be more careful with my terminology.

The dollar hasn't seemed to have much of an impact on bond yields recently. Obviously the normal movement should be dollar bearish = bond bearish. I'm writing a post on this today.

In Debt We Trust said...

How will the tsy market react now that the last POMO is 10/29? Steepener crowd is beating the flattener crowd based on supply alone. What source of easy profits will the primary dealers turn to now?

Salmo Trutta said...

Bloomberg: "the Treasury plans to lengthen the average due date of its outstanding debt to 72 months from a 26- year low of 49 months. That may mean boosting sales of 10- and 30-year securities by 40 percent over the next year to $600 billion"

Won't this hurt the housing market?

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