Déjà Vu Strikes In Rough Long Bond Sale
A tail at Thursday's 30-year auction was all but a foregone conclusion.
The long bond cheapened a bit into the sale, but 30-year yields are down dramatically from last month's highs, and more to the point, recent history doesn't favor stop-throughs at 30-year auctions.
Reception for Wednesday's 10-year sale was mediocre (at best), but bonds took it in stride, leaving the bullish long-end momentum intact. Fast forward 24 hours and Thursday's supply event was a lot worse than mediocre.
The long
Clearly there are a limited pool of buyers of long duration Treasury bonds…primarily insurance companies, pension funds etc. And such intraday volatility in rates in US Treasury markets runs the risk of eroding confidence. The time has come to ban short selling of Treasuries of 10 yr and longer duration. Also the FED needs to expand the facility they opened earlier this year to purchase Treasuries that are “underwater”, at par from banks. They need to allow insurance companies and pension funds to do the same…, to unload any of their inventory that is “underwater” for par as long as they agree to use that capital to purchase Treasuries that are being newly issued. Confidence will continue to erode along with liquidity from buyers if a few more long duration bond auctions go poorly.
I only know of the BTFP (sp?) facility that lets banks borrow against their Treasuries at par, and pay >5% for doing so. Banks are (sometimes) doing so, for liquidity and investor comfort reasons.
Insurers don’t have those liquidity threats (no such thing as a “run on the insurer”) and investors seem to be getting comfort from the juicy premium increases (“hard market”). I’m not sure about pension funds, but I don’t think they, as a group, are under imminent stress either.
Seems like the market is seeing how much it can push Yellen. After all, if you need to buy a long bond, you might be able to park in a 30 day bill and buy that long bond next month, especially if you’re feeling after losing so much money with the last two years of long bond buys.
“feeling burned”, I meant to write.