Seven Year Itch

July 30th, 2009 11:52 am | by John Jansen |

Predicting the results of the auctions is normally rather prosaic and pedestrian but this week it is a particularly perilous enterprise. The first two auctions have surprised prognosticators with weak demand and tails.

This issue , as was the 5 year note and to a lesser extent the 2 year note before it, is on the cheap side. I like to watch the 5 year/7 year/10 year butterfly and that butterfly spread is 34 basis points (using the WI 7 year note).  The first seven year note auction back in March printed about 40 basis points cheap and the range has been 40 to zero.

So there is no question that the issue is cheap. Sometimes, however, things are cheap for a reason. With the first two auctions so sloppy and each of them so far underwater that owners of each will be dialing Jaques Cousteau for aid, I do not know why dealers would bid aggressively for this one.

For that matter, why would investors bid aggressively? If you miss this one the Treasury will announce 3 year, 10 year and 30 year bonds on Wednesday. That duration laden troika of bonds should total around $ 75 billion.

Absent some miraculous deus ex machina rescue from the central banks I suspect that the sometime after the auction, we will once again visit the 3.75 percent level on the 10 year note.

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  1. 7 Responses to “Seven Year Itch”

  2. By Tyler K on Jul 30, 2009 | Reply

    Within the comfort and confines of my virtual account, I have just found a willing counterparty and a trade has been transacted at a level of, for argument’s sake, 3.345%, on the 7yr.

    I have shorted and John has taken the long side.

  3. By Alex on Jul 30, 2009 | Reply

  4. By vol-trader on Jul 30, 2009 | Reply

    try not to spend all of Tyler’s ‘money’ in one place John! what was the DV01 on that trade BTW?

  5. By John Jansen on Jul 30, 2009 | Reply

    I have no capital left!!

    Can you set me up for some TARP money?

  6. By John Jansen on Jul 30, 2009 | Reply

    I thought you were doing your own Musical Interlude

  7. By sbenard on Jul 30, 2009 | Reply

    Good grief! Manic markets!

    Will this become the “new normal” with all the debt being issued? One day we plunge, the next day we rocket higher!?

    I don’t know what the auction result was, but I know how to read the charts. This week has been chaos!

  8. By Tyler K on Jul 30, 2009 | Reply

    [John’s Virtual Broker]This is a reminder that your maintenance margin level will very likely be breeched at the conclusion of today’s business and you will be required after today’s settlement, and prior to the open of trading tomorrow, to deposit your variation amount into your account. Failure to refund your account to the required initial margin level will result in immediate liquidation of that position, as permitted under the rules outlined by the virtual exchange.

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