Pre-Auction Set Up and Stock Lever Push MBS to Lows of Day

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In less than 60 minutes the Treasury will release the results of the 30 year bond auction. Ahead of the 1pm bid cutoff we are seeing profits being booked in the long end of the yield curve.

Check out price action on the 10yr TSY futures contract below ...notice how the size of sell tickets has increased as we draw closer to the release of auction results. This illustrates that traders are nervous about how the 30 yr auction will play out....when feeling defensive, one should limit their position and wait it out for post-auction guidance.

The long bond has just about fully recovered from its quarter-end  sell off. Unfortunately that sell off served as a sizable auction concession...which has now been erased. The UST30YR  tested its late March yield lows this morning. Once that "too rich" level was hit, traders were quick to consolidate gains and push prices/yields back above this level.  View this as the pre-auction concession.

The 10 yr note yield has risen to its highest yield of the day amidst position squaring. The 3.625% coupon bearing 10 year note is currently -0-03 at 97-30+ yielding 3.877%.

The FN 4.5 is -0-02 at 100-00 yielding 4.507%....at its lowest price of the day.

Besides the pre-auction setup pushing "rate sheet influential" yields to their intraday highs....the stock lever is adding some pressure as well. The S&P has recovered from earlier losses and is now trading in the green...currently +0.09% at 1183.51.

I will publish auction results has quickly as possible. Check the comments of this blog post around 1:05. I will let you know how things went and where the market is headed.

My outlook: recent weakness in the long end of the yield curve was over emphasized by a lack of liquidity around quarter-end and several positive economic reports. However, nothing has changed in the big picture. The number of people out of work for more than 27 weeks is extremely high. Non-government job creation will be temporary at best. Resource slack in the economy is preventing inflation from rising. Thus...I view this long bond as a good opportunity to grab some extra yield. I am hoping for an extension of the recent rates rally!

 

REPRICES FOR THE WORSE TO BE CONSIDERED AROUND 99-26. Still some room but stay tuned...