Wednesday, July 9, 2014

Treasuries Soft Facing Low Yield 10 Yr Auction




The meat of the auction cycle starts today with $21B of 10yr Treasuries.  Otherwise, active traders will look to the FOMC minutes for guidance.  Following Friday’s initial post-payroll sell-off, 10yr yields fell 12 basis points from nearly 2.68% to 2.56% late yesterday.  Ironically, at the same time, economists were bringing forward their expectations for the timing of a Fed policy rate response to stronger employment growth and firming inflation.

The treasury borrowing schedule is in full swing with the 10yr action today.  Foreign buying has been in the spot light recently, in particular speculation that the PBOC has been masking buying through a Euro facility.   Ten year Treasuries yield only 2.57% right now, the lowest pre-auction yield since the June ’13 auction, more than a year ago.  Participation at this auction could give strong clues as to the prospects for rates over the second half of the year. 

Today’s FOMC meeting is not expected by many to show much surprise.  However, if the Fed is to deliver at the July 30th FOMC meeting a revised exit strategy from excess accommodation, we should expect to read in the minutes released today about consensus thinking on some of the major points.  Any firming of the exit strategy outline shown in today’s minutes may initially be interpreted (rightly or wrongly) as having bearish connotations. 

The fall in Treasury yields since the payroll report on Friday has accompanied some weaker data from Europe.  Weaker than expected Industrial Production and exports in Germany, a linchpin for European growth, has pushed bund yields lower, making U.S. securities relatively more attractive.  The current 1.35% yield differential between U.S 10yr note and the Bund is as wide as it has been since mid-1999, attracting foreign buying to the States. 



Volume in TY since Friday has been at or below the 3 week average, leaving somewhat of a question mark on the advance that did attract some additions to open interest yesterday (+68k).  CFTC described ‘non-commercial’ accounts indicated Friday that they were collectively short 28K TY as of last Tuesday from basically flat in the prior week. 

Technically, TYU has formed a bullish hammer on Friday and a bullish Harami as a result of Friday/Tuesday combined price action.  Prices settled yesterday above the ‘mid’ of last Thursday’s bearish session.  Just above the 125 strike, there are two consecutive bearish session in the ‘shooting star’ and ‘hanging man’ that were confirmed in subsequent trade.  Any advance should be expected to find strong resistance against the late-June highs.  Conversely, the bullish hammer of last Friday shows support against the mid-June bullish Harami and suggests that any sell-off will contend with support at 123-27.   


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