Across the Curve

Huge Foreign Demand for Treasuries

Via WSJ:
By Min Zeng
Updated June 9, 2016 7:38 p.m. ET
36 COMMENTS

The global hunger for U.S. government debt is intensifying as investors seek better returns from the negative yields and record-low rates found in Japan and Europe.

On Thursday, an auction of 30-year Treasury debt attracted some of the highest demand ever from overseas buyers, at a yield of 2.475%, the lowest for the 30-year bond since January 2015.

It was the second sale in as many days to draw strong foreign interest. On Wednesday, the Treasury sold $20 billion of 10-year notes with a record share going to buyers outside the U.S., offering a yield of 1.702%, down sharply from the 2.461% investors got a year ago.

The European Central Bank’s bond-buying program and a negative-rate environment in Japan are keeping U.S. yields down even as riskier assets like stocks and oil have risen. These forces also show how global flows of money are making it difficult for the Federal Reserve to control the path of U.S. interest rates.

Yields on 10-year government bonds in Germany, the U.K., Switzerland and Australia all closed at record lows Thursday. The yield on the German bond is just four hundredths of a percentage point away from turning negative, which would mean buyers would get back less than they paid if they held the bonds to maturity.

U.S. Treasurys are the “one-eyed king,’’ said David Keeble, global head of interest-rates strategy at Crédit Agricole SA . “There is just a shortage of yield on the planet.’’

The 30-year German government bond yielded 0.63% on Thursday. The bond of that term in Japan was even stingier, at 0.30%. In Switzerland, the 30-year bond yielded 0.07%. Bond yields move inversely to prices.

The 10-year Japanese and Swiss bonds both yielded below zero.

One proxy measure of demand from foreign central banks and private-sector buyers jumped to 64.9% in Thursday’s auction of 30-year Treasury bonds, up from an average of 60.1% in the past eight sales. It was the fourth-highest level of demand from foreign investors for a 30-year bond on record.
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In the 10-year auction, the proxy measure for foreign demand reached 73.6%, topping the 73.5% record set a month earlier.

Thirty-year bonds typically attract a specialized audience, largely pension funds and other investors trying to buy assets to match long-term liabilities. There are few viable alternatives for such buyers around the world.

The frenzy of buying has sparked warnings about the potential of large losses if interest rates rise. The longer the maturity, the more sharply a bond’s price falls in response to a rise in rates. And with yields so low, buyers aren’t getting much income to compensate for that risk.

Bill Gross of Janus Capital Group Inc. said in a comment on the firm’s Twitter feed that global yields were the lowest “in 500 years of recorded history” and warned that the large mass of negative-yielding bonds around the world is “a supernova that will explode one day.”

Money managers said they recognize the dangers. But with ECB and Bank of Japan continuing to buy government bonds, the competition among private-sector investors to obtain these debt instruments may get more intense and send yields lower still.

Among buyers from this week’s Treasury auctions was Jason Evans, co-founder of hedge fund NineAlpha Capital LP, who is former head of U.S. government bond trading at Deutsche Bank AG and Goldman Sachs Group Inc. Mr. Evans said this week’s moves suggest bond yields could fall further, meaning investors’ options could become even less appealing.

“The world is awash with negative-yielding bonds,’’ said Mr. Evans. “The Treasury bond market is the tallest pygmy. That is the world we are living in now.’’

He said the U.S. 10-year yield could fall to 1.5% in coming months. On Thursday, the 10-year yield dropped to 1.678%, the lowest since its 2016 nadir of 1.642% on Feb. 11.

Back then, the Dow Jones Industrial Average closed at 15660.18. On Thursday, the blue-chip index finished at 17985.19, about 325 points from its all-time high.

Demand for Treasurys often reflects a flight from risk, but it now appears to be motivated by a hunt for yield, said Michael Purves, chief global strategist at Weeden & Co.

“As foreign bonds get bid and those yields go down, that falls right into our laps over here in Treasurys,” said Mr. Purves.

Analysts said central banks’ moves to stimulate the economy have distorted market signals and made it difficult for investors to assess the fair value for bonds.

Lynn Chen, senior portfolio manager at Aberdeen Asset Management, which had $420.9 billion of assets under management at the end of March, said the simultaneous strengthening of safe-haven bonds and stocks might not be sustainable. She said Treasury bond yields may be the one to give.

She said they could rise later this year. The U.S. economy has been resilient, worries over a sharp slowdown in China have eased and oil prices have risen sharply from a 2016 low hit in February, said Ms. Chen.

Still, some investors have to make do with skinny government bond yields, because they have the mandate to invest in high-grade sovereign debt.

“The global demand for fixed-income products, seemingly at any price, remains profound around the world,’’ said Thomas Simons, a money market economist at Jefferies in New York.

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I Love the Smell Of Napalm in the Morning

Government bond yields around the globe are making fresh lows this morning and equity markets are in the red. Via the WSJ:
By Riva Gold
Updated June 10, 2016 5:12 a.m. ET

Global investors sold stocks and commodities and pushed government-bond yields in Germany, Japan and the U.K. to fresh all-time lows as a range of political and economic uncertainties continued to take a toll on sentiment.

The Stoxx Europe 600 dropped 1.3% in morning trade, following modest losses in Asia. Futures pointed to a 0.4% opening loss for the S&P 500. Changes in futures don’t necessarily reflect market moves after the opening bell.

Bourses in Europe were dragged down by falls in banks and energy companies, as a recent appreciation of the greenback pressured dollar-denominated commodities. Brent crude oil fell 1.3% to $51.30 a barrel after snapping a rally on Thursday, while gold retreated slightly from three-week highs and copper fell 0.9% to $4,499 a ton.

Government-bond yields in Japan, Germany and the U.K. notched new record-low levels on Friday, dragged down by central-bank buying and a wave of risk aversion.

“It’s all quite uncertain,” said Chris Beckett, head of research at Quilter Cheviot, pointing to a range of political and monetary risks. “On both sides of the Atlantic, you worry there isn’t a clear direction for monetary policy and you’re not getting the outcomes that policy makers desire from what they’re doing.”

The Federal Reserve holds its June meeting next week, while the European Central Bank began purchasing corporate bonds for the first time earlier this week.

The yield on the 10-year Japanese government bond hit a fresh record low of minus 0.151% on Friday, according to data from Tradeweb.

The 10-year German bund yielded as low as 0.023%, surpassing its all-time low of 0.025% hit on Thursday. The 10-year gilt yielded 1.215%, also a fresh low. The 10-year U.S. Treasury note yielded 1.668%, closer to its February trough. Yields move inversely to prices.

Concerns around a referendum on the U.K.’s membership of the European Union on June 23 also weighed on stocks and supported government bonds, analysts said, amid concerns that a vote to leave could undermine global business confidence and hurt risky assets such as stocks in the U.K. and Europe.
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Major central banks, including the Bank of England, the Fed and the Bank of Japan, have been exploring responses to potential market disruptions that could offer should the U.K. vote to leave the EU—such as a sharp tightening of dollar liquidity—according to people with direct knowledge of the matter.

Some officials are concerned that a Brexit could spark a severe dollar shortage, the people said.

In currencies, the euro was steady against the dollar at $1.1600, while the dollar was flat against the yen at ¥107.0410.

Earlier, stocks in Japan fell 0.4%, while stocks in Australia fell 0.9% and stocks in Hong Kong fell 1.2% as the market reopened from a holiday.

China’s mainland stock markets were closed Friday.

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Early FX

Via Kit Juckes at SocGen:

<http://www.sgmarkets.com/r/?id=h10b0c605,17444793,17444794&p1=136122&p2=a8e60826fae709a7ff493c620d418b3f>

Yesterday saw the second-lowest yield ever at a US 30year Bond auction, prompting the FT to observe that creeping fears of global economic slowdown have sent yields falling across the globe. But the surge in foreign demand for Treasuries speaks as much to a lack of ‘safe’ assets as fear of recession and that, coupled with confidence that the Fed will maintain its bias for rates to be lower for longer rather than take any risks, drives this trend. And of course, it’s not as though this trend of falling 30year yields is particularly new. They’ve fallen steadily for over 30 years: Indeed, 30yr US yields have fallen less than either Fed Funds or that German Bunds.

Falling yields are nothing new….

[http://email.sgresearch.com/Content/PublicationPicture/227192/1]

If policy rates stay low enough for long enough in all the major economies and central banks buy up a big enough chunk of the bond market, I can’t see how investors can avoid a cycle of lurching from any higher-yielding asset available, however risky, to the safety of Treasuries and Bunds and then back again. No wonder Mario Draghi is pleading with governments to get a move on and enact the structural reforms without which Europe has no chance of escaping a slow-growth, high unemployment prison.

That pattern in bonds is repeated in FX, in the form of the flip-flop from risk-on to risk-off. So the debate on mornings like this is about whether the absurdly low yields in G3 government bonds are going to force investors towards emerging market currencies, or are a sign of growing fears which will force them towards safe havens. The answer’s somewhere halfway between, with US equities (SPX) backing off highs while Asian equities wilt a bit. Our H2 FX Outlook should be out this morning sometime, see that for updated views.

Today’s already seen the release of strong French and German industrial production data and we should see a bounce in UK Q2 constructing spending. US U-Mich CSI is likely to fall to 93 and Canadian jobs data are due. A 50bp rate cut is likely in Russia, to 10.5%. Finally, nothing to add on the UK referendum except to note that we are seeing signs of this turning up all over the place in FX – it’s a driver of yen strength and also of Swiss franc strength as safe-havens get a further lift. We’re staying short GBP/USD, and short AUD/USD with a stop above 0.75 that managed to avoid being triggered again yesterday.

‘Brexit’ infects the Swiss franc

[http://email.sgresearch.com/Content/PublicationPicture/227192/4]

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Citibank Sees Brexit Driven Flight to Quality

Via Bloomberg:
June 9, 2016 — 6:00 PM EDT

Ten-year note yield may reach 1.5%, Citigroup predicts
Volatility before 2015 Greek vote suggests ‘massive’ flows

U.S. Treasury yields may fall toward record lows if British voters decide this month to leave the European Union, according to Citigroup Inc.

A vote on June 23 to exit the 28-nation bloc may weaken the U.K.’s trade links, crimp economic growth and business confidence and spark “massive” demand for Treasuries as a haven, Jabaz Mathai, a U.S. rates strategist at Citigroup in New York, wrote in a June 3 note. The bank is one of the 23 primary dealers that trade with the Federal Reserve.

“A leave vote should manifest itself as a classical flight-to-quality event,” Mathai wrote. “We are also likely to see a capital outflow from the U.K. and a massive” inflow into Treasuries.

Fed policy makers have already flagged concern that a British “leave” vote may undermine global financial conditions and potentially spur a flight to safety that could buoy the dollar. Polls point to a close race.
Hedge Specter

The benchmark 10-year U.S. note yield may sink to 1.5 percent even before the vote should investors buy as a hedge on any signs the “remain” camp is losing ground, Citigroup predicts. The maturity yielded 1.69 percent Thursday, compared with the record low of 1.38 percent set in 2012.

As a guide, Citigroup is looking to the surge in demand for Treasuries in 2015 before Greece’s referendum on proposals needed to restore bailout aid. Ten-year Treasury yields fell in the lead-up to the July vote, and then rebounded after the proposals were approved.

Those campaigning for the U.K. to leave the EU say an exit would give the government more control over migration and borders. Those lobbying against the departure, including Prime Minister David Cameron, warn of the dire economic consequence of a pullout.

Citigroup economists give Brexit a 30 percent to 40 percent probability, according to the June 3 note. Mathai declined to comment beyond the report.

While Brexit has been on the radar at least since the beginning of the year, “anxiety in markets starts building up only as the horizon gets closer,” Mathai wrote.

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Fed’s Brobdingnagian Balance Sheet Too Small

Via Bloomberg:

Fed’s Balance Sheet May Be Too Small by at Least $1t: Cumberland
2016-06-09 15:22:32.478 GMT

By Alexandra Harris
(Bloomberg) — Fed’s balance sheet should be ~$5.5t, or $1t
bigger than its current size, given global demand for physical
cash, liquidity coverage ratio (LCR) requirements and foreign
bank demand, Cumberland CIO David Kotok writes in note.

* NOTE: Fed’s balance sheet $4.461t as of June 1
* “If reserve assets are scarce, then the prices of
substitutes should be bid up, and rates should fall,” as
evidenced by the shift in yield curves
* NOTE: U.S. 2/10 curve touched 89.2bp, flattest since
Nov. 2007
* Cumberland est. says ~$1.5t needed to meet demand for
physical cash; ~$1.5t needed to meet demands of foreign
banks and cash pools, a number that’s growing every year;
~$2t needed to meet liquidity coverage ratio (LCR)
requirements for U.S. banks by Jan. 2017
* Fed needs to provide Treasury with ~$300b-$400b
annually, though “there has been no growth since QE
stopped”
* U.S. dollars may be growing scarce, given the widening
spreads in the euro/dollar term structure
* Flows into dollars aren’t symmetrical between dollar and
euro, which means demand is rising for dollars to be
held at the Fed
* Flows likely to grow, as is demand, as they figure into the
LCR calculation for both foreign and U.S. banks
* Dollars at the Fed aren’t “truly excess reserves” but
function like required reserves because of LCR
* If Fed doesn’t provide enough of those dollars, “the
prices of other assets change in response,” as seen in
the 2Y yield curves
* Fed can set IOER, size of balance sheet separately, though
“how it does so and what assets it acquires are the
important issues”
* Unknown is what happens if Fed “ignores the essential
role that ‘excess reserves’ play”
* Additional asset purchases will also flatten curves, though
“it will at least provide the world with the dollars it
seeks in order to meet LCR”
* If the Fed raises IOER to 75bps, then the spread widens more
and curve flattens more
* Fed needs to increases volume of “scarce LCR-qualified
resource” every time it raises IOER

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FX Arbitrage Breaks Down

Via Bloomberg;

A Breakdown in Old Rules Leads to a Rethink on How Global Markets Work
2016-06-09 19:00:40.737 GMT

By Matthew Boesler
(Bloomberg) — A standard textbook relationship that every
student of economics learns in school has been flipped on its
head, and it’s leading to a major rethink on the connection
between bank balance sheets, exchange rates, global asset
prices, and monetary policy.
The prices of derivatives used for hedging currency risk
are violating no-arbitrage rules, a development that points to a
significant decline in global banks’ ability to intermediate
capital flows from global investors, in part because of new
regulations that have been introduced in recent years.
That decline in intermediation capacity appears to have
heightened the sensitivity of exchange rates and global asset
prices to monetary policy since the crisis, and helps explain
some of the unusual gyrations witnessed recently in markets —
like extreme moves in the so-called cross-currency basis, which
according to traditional theory should be non-existent, and
mostly was before the crisis that began in 2007.
“Financial markets, for their part, appear to be tethered
more closely than ever to global events, and the real economy
appears to dance to the tune of global financial developments,
rather than the other way round,” Hyun Song Shin, head of
research at the Bank for International Settlements, said
Wednesday in a speech on the topic during a gathering at the
World Bank in Washington.
Shin cited recent research from New York University
economist Xavier Gabaix and Harvard economist Matteo Maggiori,
who developed a theory of exchange-rate determination based on
capital flows in the presence of constraints on bank balance
sheets.
“Since financiers require compensation for holding currency
risk in the form of expected currency appreciation, exchange
rates are jointly determined by capital flows and by the
financiers’ risk bearing capacity,” Gabaix and Maggiori say.
“Financiers both act as shock absorbers, by using their risk
bearing capacity to accommodate flows that result from
fundamental shocks, and are themselves the source of financial
shocks that distort exchange rates.”
This is not at all the traditional understanding of what
determines exchange rates, which has largely to do with
macroeconomic fundamentals. The theory, however fits well with
what we see in the foreign-exchange derivatives market, where a
long-standing relationship known as covered interest parity, or
CIP — which states that the interest rate implied by the forward
exchange rate in a currency swap should match the short-term
interest rate in the home country of the currency that is
borrowed in the swap — has completely broken down.
The deviation, known as the cross-currency basis, became
extreme during the 2008 financial crisis, flared up again during
the euro crisis in 2011 when banks were in trouble, and returned
to a lesser extent at the end of last year as global banks
adapted to new regulations on leverage.
“I used to tell my students that CIP is about the only
relationship that can be relied upon in international finance,”
Shin said in his speech. “I know better than to say this now.
Textbooks still say that CIP holds, but it is no longer true.”
An examination of the movements in the cross-currency basis
provides some empirical backing to Gabaix’s and Maggiori’s work.
The swings, which have lately become more pronounced around the
end of the quarter as banks pare down their balance sheets to
meet regulatory requirements, “point to key frictions in
financial intermediation and their interactions with global
imbalances during the post-crisis period,” according to Federal
Reserve economists Wenxin Du and Alexander Tepper, and MIT
economist Adrien Verdelhan.
“Before the global financial crisis, global banks actively
arbitraged funding costs across currencies and enforced the CIP
condition,” they wrote in a paper posted online last month.
“Since the crisis, a wide range of regulatory reforms has
significantly increased the banks’ balance sheet costs
associated with arbitrage and market making activities.”
The trade is one of many that banks have pulled away from
because the returns are too low to justify the increased capital
that must be held against them. Moreover, other market
participants like hedge funds are less able to step in and take
advantage of the arbitrage opportunity than before as well
because they rely on funding from banks to do the trades, and
banks are less willing to provide it because doing so inflates
their balance sheets.
The upshot is that exchange rates are now more susceptible
to capital flows than before. And according to Shin, that in
turn means more volatility in global markets during periods of
U.S. dollar appreciation, because the cost of hedging currency
risk will rise for global investors holding dollar-denominated
assets. He finds a strong negative relationship between the
value of the dollar and the growth of dollar credit extended by
banks.
“During the period of dollar weakness, global banks were
able to supply hedging services to institutional investors at
reasonable cost, as cross-border dollar credit was growing
strongly and easily obtained,” Shin said in his speech.
“However, as the dollar strengthens, the banking sector finds it
more challenging to roll over the dollar credit previously
supplied.”
Increased fragility in currency markets, and higher
sensitivity of asset prices to currency swings, means the Fed
will have to take additional caution in raising interest rates,
especially while many other major central banks are going in the
opposite direction and demand for safe, dollar-denominated
assets worldwide remains elevated.

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Bearish George Soros Back in the Saddle

Via the WSJ:
By Gregory Zuckerman
Updated June 8, 2016 8:03 p.m. ET

After a long hiatus, George Soros has returned to trading, lured by opportunities to profit from what he sees as coming economic troubles.

Worried about the outlook for the global economy and concerned that large market shifts may be at hand, the billionaire hedge-fund founder and philanthropist recently directed a series of big, bearish investments, according to people close to the matter.

Soros Fund Management LLC, which manages $30 billion for Mr. Soros and his family, sold stocks and bought gold and shares of gold miners, anticipating weakness in various markets. Investors often view gold as a haven during times of turmoil.

The moves are a significant shift for Mr. Soros, who earned fame with a bet against the British pound in 1992, a trade that led to $1 billon of profits. In recent years, the 85-year-old billionaire has focused on public policy and philanthropy. He is also a large contributor to the super PAC backing presumptive Democratic nominee Hillary Clinton and has donated to other groups supporting Democrats.

Mr. Soros has always closely monitored his firm’s investments. In the past, some senior executives bristled at how he sometimes inserted himself into the firm’s operations, usually after the fund suffered losses, according to people familiar with the matter. But in recent years, he hasn’t done much investing of his own. That changed earlier this year when Mr. Soros began spending more time in the office directing trades. He has also been in more frequent contact with the executives, the people said.

In some ways, Mr. Soros is stepping into a void at his firm. Last year, Scott Bessent, who served as Soros’s top investor and has a background in macro investing, or anticipating macroeconomic moves around the globe, left the firm to start his own hedge fund. Soros has invested $2 billion with Mr. Bessent’s firm, Key Square Group.

Later in 2015, Mr. Soros tapped Ted Burdick as his chief investment officer. Mr. Burdick has a background in distressed debt, arbitrage and other types of trading, rather than macro investing, Mr. Soros’s lifelong specialty. That is why Mr. Soros felt comfortable stepping back in, the people said.

Mr. Soros’s recent hands-on approach reflects a gloomier outlook than many others on Wall Street. His worldview darkened over the past six months as economic and political issues in China, Europe and elsewhere have become more intractable, in his view. While the U.S. stock market has inched back toward record levels after troubles early this year and Chinese markets have stabilized, Mr. Soros remains skeptical of the Chinese economy, which is slowing.

The fallout from any unwinding of Chinese investments likely will have global implications, Mr. Soros said in an email.

“China continues to suffer from capital flight and has been depleting its foreign currency reserves while other Asian countries have been accumulating foreign currency,” Mr. Soros said. “China is facing internal conflict within its political leadership, and over the coming year this will complicate its ability to deal with financial issues.”

Mr. Soros worries that new troubles will arise in China partly because he said the nation doesn’t seem willing to embrace a transparent political system that he contends is necessary to enact lasting economic overhauls. Beijing has embarked on overhauls in the past year but has backtracked on some efforts amid turbulent markets.

Some investors are beginning to anticipate rising inflation amid recent wage gains in the U.S., but Mr. Soros said he is more concerned that continued weakness in China will exert deflationary pressure—a damaging spiral of falling wages and prices—on the U.S. and global economies.

Mr. Soros also argues that there remains a good chance the European Union will collapse under the weight of the migration crisis, continuing challenges in Greece and a potential exit by the United Kingdom from the EU.

“If Britain leaves, it could unleash a general exodus, and the disintegration of the European Union will become practically unavoidable,” he said. Still, Mr. Soros said recent strength in the British pound is a sign that a vote to exit the EU is less likely.

“I’m confident that as we get closer to the Brexit vote, the ‘remain’ camp is getting stronger,” Mr. Soros said. “Markets are not always right, but in this case I agree with them.”

Other big investors also have become concerned about markets. Last month, billionaire trader Stanley Druckenmiller warned that “the bull market is exhausting itself” and hedge-fund manager Leon Cooperman said “the bubble is in fixed income,” though he was sanguine on stocks.

Mr. Soros’s bearish investments have had mixed success. His firm bought over 19 million shares of Barrick Gold Corp. in the first quarter, according to securities filings, making it the firm’s largest stockholding at the end of the quarter. That position has gained more than $90 million since the end of the first quarter. Soros Fund Management also bought a million shares of miner Silver Wheaton Corp. in the first quarter, a position that has increased 28% so far in the second quarter.

Meanwhile, gold has climbed 19% this year.

But Mr. Soros also adopted bearish derivative positions that serve as wagers against U.S. stocks. It isn’t clear when those positions were placed and at what levels during the first quarter, but the S&P 500 index has climbed 3% since the beginning of the second period, suggesting Mr. Soros could be facing losses on some of those moves.

Overall, the Soros fund is up a bit this year, in line with most macro hedge funds, according to people close to the matter. The investments by the firm were previously disclosed in filings, but it wasn’t clear how involved Mr. Soros was in the decisions spurring the moves.

The last time Mr. Soros became closely involved in his firm’s trading: 2007, when he became worried about housing and placed bearish wagers over two years that netted more than $1 billion of gains.

Write to Gregory Zuckerman at [email protected]

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Corporate Bond Allocations at Record High

This Bloomberg story would lead one to suppose that if you know how many corporate bonds you own,then you don’t own enough!

Via Bloomberg:

IG CREDIT: New Record High for Client Allocations to Corporates
2016-06-08 16:49:47.369 GMT

By Robert Elson
(Bloomberg) — Client allocations to corporate bonds rose
to 36.4% in the latest week, according to SMR Money Manager
Survey. The previous week at 36.3% was the prior record.

* The year started at 35.7%
* The survey began at the all time low of 19.1% in 1999
* According to SMRA’s John Canavan, “Over the past 5 years,
corporate allocations have averaged 34.2% of assets, ranging
from 32% to today’s 36.4%”

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Dearth of 10 Year Debt for (Once) Dominant Dealers

Via Ian Lyngen at CRT Capital:

*** The auction was strong with a 0.4 bp stop-through and non-dealer bidding at 80.8% vs. 75% norm ***
* 10-year auction stops at 1.702% vs. 1.706% 1-pm bid WI.
* Dealers were awarded 19.2% vs. 25% average of last four 10-year Reopenings.
* Indirects get 73.6% vs. 62% norm.
* Directs take 7.2% vs. 13% average.
* Bid/Cover was 2.70 vs. 2.66 average of last four.
* Dealer Hit-Ratio: Dealers take 11% of what they bid for vs. 14% norm.
* Indirect Hit-Ratio: Customers take 89% of what they bid for vs. 92% norm.
* Treasuries were trading higher ahead of the auction, failing to build in a meaningful pre-auction concession. Since the results, Treasuries have traded sideways.
* Overall Treasury volumes have been below-average, with cash trading at 8% of the 10-day moving-average. 10s have been light at 72% of the auction-day norms in cash terms, with a 30% marketshare vs. 31% average. 5s have been active, taking a 34% marketshare, while 7s took 9%, 3s 16%, and 30s 5%.

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Ten Year Note Auction Preview

Via Ian Lyngen at CRT Capital:

We are cautiously optimistic about this afternoon’s 10-year auction and expect non-dealer interest to be significant (average is 75% for this benchmark) and see the risks skewed toward a stop-through  The dive in global yields to record lows has refocused the market on interest rate differentials and we suspect this will prove supportive for the auction.  This morning’s absence of even a modest concession off the recent low yield marks is troubling and if the auction tails it will ultimately be a function of the low outright yield levels.  Foreign awards at the last four reopenings have increased to 26%, leaving overseas bidders as a key wildcard and one we suspect will be supportive in light of the volatility of global risk assets.  On the other hand, the sector has seen below-average volumes overnight at just 70% of the norm, but with an average market-share of 34%.

* Recent 10-year auctions have met strong receptions with four of the last five auctions stopping-through for an average of 1.6 bp vs. the December 0.1 bp tail and March tail of 0.5 bp.

* Foreign awards at 10-year reopenings have increased over the last four auctions, taking 26% or $5.4 bn vs. 24% or $5.1 bn at the prior four. In addition, investment fund interest has increased over the same period, taking 46% or $9.4 bn vs. 44% or $9.1 bn prior.

* Indirect awards have increased, taking 64% at the last four reopening auctions vs. 59% at the prior four.  Over a comparable period, direct bidding has been stable at 12%.

* The technicals remain bullish with momentum decidedly in favor of lower yields – although stochastics are creeping towards overbought territory.  The NFP-inspired rally has left yields in a relatively narrow trading range of 1.70% to 1.74% — initial resistant and support.  For more meaningful resistance we’re watching the 1.695% NFP-day low yield mark and then the 1.645% isolated yield low from late-Feb. Further support comes in at the 9- and 21-day moving-average cross of 1.795% before the 40-day MA at 1.803% — which is near the NFP-day yield peak of 1.811%.

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