7s stop THRU; post FOMC positions UPDATE; techs and 2s
Since this mornings brief update, a couple / few items have been inboxed. First, how about that 7yr auction …
7-year auction stops through 0.1 bp; strong non-dealer awards
* Today's 7-year auction was fair (strong given the lack of concession) with a stop through of 0.1 bp and non-dealer bidding of 85.5% vs. an average of 80.6%.
* 7-year auction stopped at 1.769% vs. six auction average of 1.344%.
* Bid/Cover was 2.36x compared to an average of 2.28x.
* Dealers took 14.5% vs. a 19.4% average.
* Directs claimed 22.9% vs. a 20.3% norm.
* Indirects were awarded 62.6% vs. an average of 60.3%.
* In the run-up to the auction rates were lower on the day and since the results this has been extended.
Here’s visual of 7s — best I am able now in my post-BBG life — where it appears to ME to be consolidation before some sort of ‘next leg higher’ … Momentum (bottom panel) isn’t giving any sort of compelling signal,
How do YOU read things post FOMC and decent bidding as rates take a step back from the edge of (yeterdays) QT/HIKE euphoria?
Speaking of POST FOMC, here’s a positions update
FOMC After-Action Report: Curve Collapse
… >>> POST FOMC AUTOPSY
What happened yesterday?
The market was mildly short into FOMC and on raised activity / flows (post FED) we saw an aggressive addition to new shorts across the curve (at $13m / zscore +3.0 / top 10ish event) with the largest concentration of risk in the belly. Similarly, volumes were raised at x1.75 avg (at the front end) as the market looks to price in x5 hikes by the end of the year.
How has the positioning setup changed?
Clearly we are shorter that pre FOMC but putting these flows into context, we still find that over the week we have been a net buyer of duration - short covering $22m, new longs $18m vs $15m of new shorts (mostly yesterday)… … this leaves the market slightly shorts (at $28m) and back in the realm of short profits ($72m/15bps in profit) offset by long losses ($45m/26bp in loss) BUT not extended short.
Is fast 1mth positioning a major driver?
NO! …. but it is getting shorter (at $25m) but this is far from the shorts we saw last week at more than $50m. Profits? growing BUT concentrated at the front end…
… So who was/is buying?
Looking at intra-day price action we see that treasuries continue to rally in pre US hours (and today was no different - US sells, Asia/EU say “thank you! Mine”)… accounts who were short and took profits into richening and now remain happy to add to duration at these cheaper levels. In our own flow we see that banks have moved into longs, with the bias for long swap spreads and steepeners…
… So who has been buying? Rallies in treasuries have mainly occurred during Asian hours (US sells / Asian and Europe say mine)... meanwhile the major change positioning setup has been banks how had been buying into the Jan cheapening (and are now net long).
Saving the best section for last, they offer this,
Where is the pain trade?
Extended steepeners had been built by fast money at the long end in both futures/swap AND we see extend shorts held in 30y. As the curve continues to flatten post FOMC (text book policy error flattening?) these positions are clearly all getting squeezed. We see 10/30s positioning now 10bps underwater below 40bps. Meanwhile large extend shorts held in 30y WNs ($18m /95th percentile) seeing profits evaporate below 190-24. So today price action is all about profit taking on short 30y WNs and stopping out of steepeners.
In contrast, large consensus short / profits held at the front end in Eurodollar whites but short momentum dominates so little pressure => in EDZ22 now more 40bps in profit and we focus on the short side with profits start at risk 98.63 in EDZ22
Did someone say PAIN TRADE? Clubber, any thoughts?
Speaking of pain, rather than ME try to offer up a visual of 2yy, here’s one along with some updated FI TECHNICALS for those degenerates (like me) attempting to play along here at home. 1stBos SAYS it all with their CoTD,
Chart of the Day: The hawkish FOMC has seen 2yr US Bond Yields surge dramatically higher again and the sell-off has extended to our 1.19% Q1 objective significantly sooner than expected – the 38.2% retracement of the 2018/2020 fall in yields. Despite the pace of the sell-off our bias is to continue to look for this to ideally hold at first for some consolidation. This though will be viewed as a temporary pause only (if indeed seen) with a clear and weekly closing break looked for in due course with support then seen next at the 1.365% low of September 2019…
Looking for MORE pain, they go on to detail some other positions,
(10yy) … Short-term Strategy: We would look to get tactically bearish at 1.77%, with key resistance seen at 1.69% and with support at 1.96%.
(30yy) … Short-term Strategy: We stay tactically bearish, looking for a move to support at 2.17% initially, then 2.32/33%. Resistance stays at 2.03%, below which we would turn tactically neutral.
There you go. IF the (longer end of the) bond market continues to go BID and they will GET BEARISH (10s) AND get STOPPED OUT of being BEARISH at the same time.
Clubber Lang might have been a rates strategist for a side hustle…