As I highlighted this morning in the latest from Bloomberg’s Richard Breslow, this is an interesting week for Treasuries.
Yields topped 2.5% this morning on the back of sharply higher crude prices and as Breslow put it, “there are a lot, lot more people talking 3% for 10s than 2%.” As Bloomberg goes on to note, “Treasury auctions may tell us more about whether investors are ready to grab higher yields after absorbing capital losses.” Right. We’ve seen some rather impressive bear steepening of late and now the question is whether investors want the extra yield or whether they’d rather hold on to their cash. As Breslow noted, this is an especially pertinent question for foreign central banks which may need to keep the cash around in order to prop up their currencies in the wake of Trump-induced capital outflows.
In any event, we get the 10Y auction today at 1 and ahead of that, here’s a preview from SocGen:
Recent performance: The $23bn 10y note auction went poorly, as demand fell. It was awarded at 2.02% compared to the 2.004% 1pm WI bid. It was the highest stop for the sector since January. The 2.22x bid/cover ratio was the lowest since the 2.14x in March 2009. Investment funds’ 40% share of the auction was their lowest of the sector since November 2015, and dealers’ 42% was their highest since January 2015 (see Table 2).
Positioning: According to the latest positioning data, dealers were net long by $0.2bn in Treasuries due in 7-11 years for the week ending 30 November compared to -$4.9bn in
previous week (see Graph 5).Relative value: The 10Y note appears to be trading rich on asset swap versus the off-the-run 10s compared with the previous two auction cycles (see Graph 7). The 10y note is trading rich on the curve compared with 5s and 30s (see Graph 8 for the recent range of the 5s10s30s fly versus the 10Y). The 2s10s curve has steepened by almost 9bp this month and 19bp since the last auction (see Graph 6).
Overall: The current 10y note showed meaningful concession this morning. It broke above the key support of 2.5% and is at its highest since October 2014 as the curve bear steepens on oil prices soaring to their highest levels since July 2015. This has made the 10y note a lot cheaper on an outright basis, which is a positive for the auction along with a steeper curve and the benchmark security trading negative on repo, indicating a short base. Negatives for the auction include the lack of setup on relative value, a busy calendar with the auction following the 3y note auction, the upcoming Fed meeting and the constraints on dealer balance sheets as we near year-end.
