Oops.
Going into this week’s 10- and 30-year Treasury auctions, there was a palpable sense of trepidation among some traders. Take Bloomberg’s Richard Breslow (whose daily market commentary is fantastic if you can get your hands on it), who wrote the following early this morning:
“Today and tomorrow, the U.S. Treasury is auctioning 10-year and 30-year bonds. The results are important. To buy bonds here you need to believe the global economy will continue to get worse and the hunt for yield knows no limits. Arguable for sure.”
“You also need to believe that the better numbers we’ve been getting will get no response for a long time. Investors will have to buy the long-end of an aggressively flattened yield curve. Do financial conditions indexes reflect reality?”
So let’s put that in context. Note that we’ve been tracking the 10Y yield here closely over the past several weeks. Of course one always wants to track the 10, but it’s become more interesting of late because of this rather surreal situation:
So what you’re seeing there is the entire Swiss yield curve trading below zero with Germany and Japan not far behind. US yields thus look remarkably attractive by comparison.
This has kept Treasurys bid even as US stocks hit new records. This dynamic has in fact been playing out for quite some time. Spot the odd one out in the following chart:
European and Japanese stocks have generally followed the 10Y lower over the past 12 months, while the S&P has posted a small gain over the same period. This would seem to argue for a bit of recoupling, if you will. Whether that means stocks falling or yields rising or both remains to be seen, but we did get a preview of what can go wrong when yields are artificially suppressed with today’s 10Y auction.
Put simply: it was ugly. Really ugly. Here are the highlights, or “low”lights, as it were from Bloomberg:
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10Y AUCTION 2.33 BID-TO-COVER LOWEST SINCE MARCH 2009
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10Y AUCTION 37.7% PRIMARY DEALER AWARD HIGHEST SINCE JAN. 2015
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10Y AUCTION 54.3% INDIRECT AWARD LOWEST SINCE JAN. 2015
Yuck. Looks like that foreign bid may be drying up. Here’s a bit more color (note the tail):
“$20b reopening was awarded at 1.516%, lowest since July 2012, vs 1.505% WI yield at 1pm ET according to Stone & McCarthy; 1.1bp tail largest since Jan. 2015, compares with avg. 0.3bp stop-through in last 6 reopenings.”
“Auction termed “poor” by Jefferies based on tail, low bid/cover and bidder participation metrics
Primary dealer award 37.7%, largest since Jan. 2015 as indirect bidder award dropped to 54.3% (lowest since Jan. 2015. Auction rated ‘2’ by four primary dealers.”
Needless to say, bonds sold off further:
What say you, Citi?
“The 10yr auction saw very weak demand with a Citi Strength Indicator of 0%.”
(Table, Chart: Citi)
Well don’t sugar coat it, tell us what you really think.
Tomorrow we’ll see what kind of demand there is for 30s. Is (another) VaR shock right around the corner?