Understanding how bond sales affect 10 year price

Discussion in 'Fixed Income' started by gaussian, Sep 10, 2019.

  1. gaussian


    I am trying to get more into treasuries - in particular options on 10 year notes because the IV is juicy at the moment thanks to orange man and China.

    However, I am having trouble wrapping my head around current events. First, bond prices move opposite of yields so we'd expected yields to raise as people leave the bond market feeling safe. So as for the recent decline, this makes sense because orange man hasn't tweeted anything controversial in literally a week and there is now hopeful sentiment that we will resolve our disputes with China.

    Reading the newswire today I saw the following articles:

    I am new to trading financial futures and derivatives on them so I only have a very simple, mostly theoretical, understanding of them.

    Could someone explain to me how these sales are driving prices in the 10 year down considering they are in 3 year and 52 week notes? You'd think the glut of new bonds would drive down yields, driving prices of futures on these bonds higher.

    What do they mean treasury offerings will be put up against corporate offerings with higher yields? How does this drag on prices?

    What other fundamentals should I be tracking on these to make sure I see the "full picture" of the 10 year futures?
  2. Cannon_Trading

    Cannon_Trading Sponsor

    Good points @Guassian - I asked my colleague, John Thorpe, ex floor trader on the CBOT for his input and here it is below:

    Fundamental factors such as Bond Sales, Central Bank intervention, Central Banker comments and large price swings in Global Equity to name a few, can all have impacts on bond prices and yields in the very short term to varying degrees, especially if the new information is not anticipated.

    Anticipation is the key.

    Forecasts of money supply form the basis of supply for credit; forecasts of new debt offerings form the basis of the demand for credit. So if you are forecasting interest rate changes from a money supply standpoint, the fundamental analyst would have to determine if his or her forecast differs from the “expected” money supply. We always have to remember that the market is very efficient when discounting prior expectations, and we need to understand what expectations have already been discounted into the current price already. This is why news driven fundamentals are typically very short term, particularly the “surprises”.

    To address your question about 52 week and 3 year notes affecting 10 years I like to look at U.S. Dept. of the Treasury daily yield curve and think about the supply and demand of the interest rate a consumer can receive and the risk associated with the time they can hold it. If I want yield, I can get it in the short time frames, so demand is highest for the shorter durations currently, Like wise , if I am looking for higher yield I may find it in corporate debentures rather than Treasury’s; again, Supply and demand affecting price. As more people demand higher corporate yields, demand for Treasuries are soft and yields will rise for the Treasury’s and prices will tend lower.

    In short, supply and demand, market expectations along with periodic surprises affect price and yield in the treasury complex.
    gaussian and tommcginnis like this.
  3. gaussian


    Thank you for this post and reaching out to your colleague.

    Where can I find the data on money supply? Could you elaborate on how these forecasts form the basis of what you suggest? This might be trivial and I apologize. You just seem like a good resource. I'd happily take links/reading material as well.

    This in particular is fairly interesting.

    So the 52 week and 3 year are affecting the 10 year primarily because if there is more credit supply to consumers (banks, etc) in the shorter time frames people will buy those up in order to not "lock up" money for as long. This will cause yields to rise in 10 year (in order to entice people back) send the price of the futures for ZN down. Your comment on corporate vs. treasury makes more sense. They are talking about "issuing it against corporate bonds" because corporate bonds are currently yielding more so people looking for short term higher yield debt may look into corporate bonds and ignore the treasuries.

    This clears up a lot but I have a follow up question - if I increase supply of credit by issue a ton more treasuries wouldn't this drive yields down because there are more available - therefore driving the price up? Right now with the new debt being issued 5 year and 2 year treasuries are all falling in lock step with the 10 year. I guess this is because the new debt wasn't issued in these timeframes so part of it is people are leaving to the shorter debt?

    Is there a place where I can get more data? This is very interesting. I know where to find yield curve data but I'd be interested in an API or something to capture new debt issuance or something.
    Cannon_Trading likes this.
  4. bone

    bone ET Sponsor

    How well an auction is received in the market is an indicator of sorts for how receptive institutional buyers are for a particular yield and issue.

    It's important to remember that certain institutional investors - namely insurance companies and some pensions are required to place a certain threshold of their assets into sovereign debt. So even if a yield or price seems completely ridiculous to your own personal sentiments, keep in mind that there's a big chunk of captive assets that are required by law or charter to buy sovereign treasuries. Life insurance underwriters come to mind especially.

    PIMCO and the CME Educational Section have good information on fixed income securities.
    Last edited: Sep 10, 2019
    T-Mex and gaussian like this.
  5. comagnum


    Bonds are catching a bounce off long term support & the futures contracts are inverse. For those that like pictures, this may explain it a bit.

    Due to the extremes in interest rates historically, the swings are also extreme.

    Last edited: Sep 10, 2019
    Cannon_Trading likes this.
  6. Cannon_Trading

    Cannon_Trading Sponsor

    There is a lot of available material on the Money Supply... here are a few links https://www.federalreserve.gov/releases/h6/current/default.htm and https://tradingeconomics.com/united-states/money-supply-m0

    Feel free to PM me and I can connect you with John directly if you like.
  7. Is anyone taking advantage of volatility after auction results in Treasuries? Do you consider this an opportunity and what is working for you?
  8. Cannon_Trading

    Cannon_Trading Sponsor

    I have tried in the past to place limits away from market with auto bracket in the direction I liked for the market....was 50/50 at best.....
    PromisingTrader likes this.