Seven Year : Not an Itch But A Soothing Massage

July 30th, 2009 1:56 pm | by John Jansen |

The treasury successfully auctioned $ 28 billion 7 year notes at a yield of 3.369 percent. That was 3 basis points expensive to levels which prevailed in the market at bidding time. So, whereas yesterday there was a 5 basis point tail in which the auction yield was 5 basis points cheap to market levels and was a victory for the trading community,this auction was a victory (Pyrrhic?) for the taxpayers as the level was through the market and will save them a few shekels each year for the next 7 years.

I will digress again as I did yesterday. Why would someone bid at levels rich to those which prevailed in the market?

There are a couple of reasons. Suppose you have a huge short position and wish to cover. To cover in the market for size might be disruptive and could send a signal to the market that there is a big buyer. So, in the single price auction which I described yesterday, the trader who bids through the market might feel comfortable doing so to make certain that he gets all the bonds he needs with out causing some disruptive price action.

The problem arises because one does not know how many other folks have the same plan and if enough bidders submit bids at levels expensive to the market ,then they shoot themselves in the foot rather than maiming the taxpayer.

That would be the result today.

I used the example of someone covering a short position but the same logic applies for someone seeking to surreptitiously establish a large long.

Separately, the curve is flattening rather dramatically today. Technicians have viewed the 252 basis point level on the 2year/10 year spread as a key level. Last night that spread closed at 249 basis points and traders were waiting to see if we tested the 252 level. At the moment that spread is 244 basis points and as long as we stay below last night’s close the technical guys will be waving the flag which says it is acceptable to be in the flattener.

In the same vain the 10 year/30 year spread is now 80 basis points. I believe we began the day at 84 basis points.

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  1. One Response to “Seven Year : Not an Itch But A Soothing Massage”

  2. By Al on Jul 30, 2009 | Reply

    or perhaps, because Primary Dealers on a short leash with the Fed, they all have a special counseling after OOPS! moments of 2yr and 5yr auctions.

    who would choose 7yr instead of 2 or 5 in these markets?

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