USTs: Supply (2s, 5s and 7s) vs DEMAND (month-end) ahead of Jackson Hole
BELLY becoming oversold (pricing tapering/hikes) becoming BUYABLE
Today’s DIPportunity (where yesterday’s 20s30s steepener still on the menu) may be the cheapening of the belly of the UST curve. Here’s a visual of 5s vs 2s10s (aka the popular kids ‘fly)
It’s back to ‘breaking badly’ for those LONG BELLY (and there are those who are long and may BE the next victims of the stop-hunt).
The visual above shows the belly of the UST curve has been ‘for sale’ relative TO 2s10s which has been flattening. To talk about the 5yr one needs a FED VIEW -- Jackson Hole is the end of the week while the 5yr is auctioned on Wednesday.
The visual above is of a more TECHNICAL nature and along those lines, momentum nearing stretch (oversold) and on the verge of a BULLISH (5yr outperformance) cross. Technically speaking, there are LONGS ‘out there’ who are on the verge of being stopped.
Today, though, is MOSTLY about Hamptons Hedge — visualized on economic data calendar advanced all week long:
And stop hunts of one sort or another … Getting taken OUT of this sort of CURVE, ‘fly exposure just ahead of auction and Jackson Hole may be the best ‘stop’ OR the absolute WORST, in as far as timing goes …
We’ll know more in the fullness of time and I’ll say that IF JayPOW & Co reflex to more current and increasing Delta angst and pushes OUT tapering/tightening further into the future, the belly of the curve will go BID.
Did I mention JayPOWs delivering his remarks remotely? Stocks (eMini) seem to have noticed, turning from lower to HIGHER on that proverbial dime:
IF, on the other hand, he green-lights a SepTAPER (Or OcTaper, whatever you like) THEN one might say we’ve priced it on the front-end BUT less support / buying by the Fed will lead TO … higher rates. Stop me if you’ve heard (or traded/hedged/invested this already before):
Jeroen Bloklands - Daily Insight
Can tapering go without higher bond yields?
The minutes of the last FOMC meeting reveal that most Federal Reserve officials are comfortable starting bond tapering towards the end of this year. Others stated it could be appropriate to hold off until early next year. In any case, negative shocks in the economy or financial markets aside, the Fed aims for gradual monetary tightening.
However, the Fed is already telling us that reducing the amount of bond purchases should not be considered tightening and that it is very different from raising rates. Technically this is true. But at least for financial markets tapering will feel as tightening. There are numerous charts out there that show that the Fed’s bond-buying program has distorted bond yields. Comparing current nominal bond yields to breakeven inflation rates, reflecting inflation expectations, like in today’s chart, is just one example. In addition, the significance of the Fed balance sheet in explaining current yield levels has risen sharply. Hence, I cannot help but thinking that tapering will provide upward pressure on bond yields. Recent months have shown that many other factors can push yields down, but at 1.22%, I’m willing to remain short for now
Whatever YOUR view, happy to discuss how to deploy capital, hedge, trade the curve (below) or pass some time.
I will note that while some shorts have been taken out (today’s Technicals for latest victim of the ‘stop hunt’ when bonds dropped BELOW 1.87%), others are emboldened.
The belly remains firmly on my radar screen here and now and will be on into / thru next weeks supply and Jackson Hole dynamic and I’d add in to the mix the month-end (supply / DEMAND) dynamic.
With Treasury selling 2s, 5s and 7s ahead of Jackson Hole -- well, whoever will buy? For some clues, here is the latest from the keeper of index stats.
08/19/2021 14:34:33[BFW]
Bloomberg Barclays Projects 0.12-Yr September Treasury Extension
By Elizabeth Stanton
(Bloomberg) -- Bloomberg Barclays estimated the following duration extensions for September 1 as of Aug 18:
U.S. Treasury: 0.12yr
One year ago (September 2020): 0.16yr
10-year average for September: 0.12yr
12-month average: 0.11yr
U.S. Agency: 0.04yr
U.S. Credit: 0.06yr
U.S. Govt/Credit: 0.09yr
U.S. MBS: 0.10yr
U.S. Aggregate: 0.10yr
U.S. High Yield: 0.08yr
U.S. TIPS (Series-L real): 0.15yr
Index extension INKBLOT test. See what you want (below year ago OR above 12mo avg OR perhaps you see it sitting right on top of the 10yr September avg…
Feel free to continue along (reading what was noted YESTERDAY) …