Just the typical auction setup for the dealers. They try to cheapen up notes before most auctions, especially if they feel their customers will not buy them at expensive levels. Reading through the Bloomberg commentary a lot of the Asians have been saying they won't buy tens until 4.60% or so, and said they want them to cheapen up. I don't think overall sentiment is bearish, it just doesn't seem like we are losing longs at a fast enough pace. We have not hit the motherload of stops yet for what were record longs about a week ago. Still not much inflation, just pre-auction shakedown to ensure they can move these notes into customers hands. Has been a regular occurence at the auctions since the last refunding in 2005, while before that auction sentiment was much more bullish.
Thanks I understand what you are saying. Where do you think the yield threshold is for the major longs to start reassessing their positions? 4.85% 4.90% 5.60%
The 106 to 107 handle seems pretty big on the downside, which is where PIMCO has been setting up the put side of their strangles. They still believe the long end is stuck in its range (are currently short over 100,000 March 107-111 strangles and looking to roll this position into June 107-111 or 106-112) so that corresponding yield is definitely under 5.00%. I would say more like 4.70% or so the current longs will have to reevaluate their position.
Mcurto, I appreciate the insight. As far as inflation, the GDP core PCE inflation was a lot higher than expected, it was around 2.3 if I am not mistaken, so inflation as it is measured may not be as tame as the fed and market believe...
Yep, noticed that one and personal consumption also much better than expected. Inflation is there but not yet showing up in major market movers such as CPI ex-food and energy, when it does there then longs will be in trouble.
"Where do you think the yield threshold is for the major longs to start reassessing their positions? 4.85% 4.90% 5.60%" By my calculations: PIMCO's strangle @ Mar 107 - 111 places the 4.85% (109) level smack in the middle. Their threshold of pain would probably be the 4.90% (108) level?
Their strangle is in the 10yr options because that is where the best liquidity is found. Right now the 10yr yield is around 4.50%, rising about 15 basis points this week, equivalent to a move of about a full point lower in the futures. So their 107 handle on the downside would be about a 4.70% yield in the cash 10yr give or take a few basis points. If it actually gets down there at that point they won't be in great trouble, will just sell some futures out of their current portfolio. PIMCO's pain point is so far away it is pretty much irrelevant. On the other hand, I'm sure there are lots of hedge funds and weaker longs that are getting dangerously close to their stop points. Not to mention we could see mortgage extension risk selling above a 4.65% cash yield since we have not been there for quite some time.
Mcurto Very interesting. I'll have to take a good look at the 10-year. It will be good to know at what point the panic selling in the bond market is going to be triggered. Will affect the stock market... Was just reviewing the 90-day treasury. Very subtle, but clean waves: yield up 56 basis points since Dec 14th. Do not see any slowdown in the overall trend, but it's in a fifth wave. So we must be getting close to a pause by the FED.