Treasurys were mostly unfazed early this week despite a mixed reception for the front-loaded supply slate.
That’s notable. The unfazed part, I mean.
Monday’s auction double-header (twos and fives) didn’t go off without a hitch. The two-year sale tailed (indirects were weak), and while the five-year sale stopped through, “strong” was… well, too strong a word. Indeed, some commentary around Monday’s Treasury rally felt forced. The two-year tail was summarily dismissed in favor of glowing descriptions of a five-year sale that was by no means extraordinary (non-dealer bidding was below average).
Fast forward to Tuesday, and the seven-year sale tailed 2bps. Indirects were soft. There was no concession and yields are obviously much lower than the last auction stop. The weak result was thus explainable and thereby excusable, but remember the narrative: With the Fed almost surely done hiking and the incoming data exhibiting a softer disposition, supply should be absorbed with relative alacrity. Instead, this week’s auctions were mixed, and that’s being quite generous.
More notable than the supply indigestion was the market’s resilience in the face of the mixed auction results. That points to two things:
- First (and self-evidently) investors aren’t keen to sell simply on supply concerns anymore, a stark turnabout from the oversupply narrative that predominated from August through October.
- Second, short-covering seems to be supporting the market. Specs are still short and CTA legacy positioning is a factor. That flow, to the extent it’s in play, could continue in the event the balance of this week’s macro data makes the case for slower growth and more disinflation.
Treasurys weakened a bit following Tuesday’s seven-year sale but, tellingly, they snapped right back on apparent block buys in two- and five-year futures, bull steepening the curve aggressively. Chris Waller was doubtlessly a factor.
