Short Sellers Dominate Trading Flows. Delay QEII Cleansing Process

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The risk trade is on and volatility is rearing its ugly head in the bond market again. Stocks and commodities are stealing our bid, leaving fast money short sellers to beat up bonds while the Fed takes a QEII break just in time for $29 billion 7s at 1pm. 

I would love to place the blame on a lack of liquidity in the long end of the curve but flows are robust as is volume. That being said, desks are manned by the JV squad today with strict instructions to stay out of the market's way. That means if flows got going in one direction, the desk should not attempt to slow momentum because the desk would get run over. That is exactly what's happening right meow. Momentum got going in the wrong direction yesterday afternoon following the sloppy 5-year note auction and it extended into today. Black box day traders are riding chopatility to profitability and no desk wants to get caught in the rip current. Bids getting hit left and right all the way down to the 124-16 strike.

Check out the 10yr TSY note futures market table below. I am showing you options. The 124-16 put is clearly catching a bid (getting more expensive = rising volatility). With the cost of put options on the rise, traders needed to let that sell off go alittle further to recover the premium they paid. And it did. The 10-year futures contract has fallen as far as 124-10, at which time we witnessed flows go more two way via short covering/position squaring. This is a positive but by no means does it imply it can't get worse. It just means the bleeding as stopped for now.

REMEMBER: no one wants to get run over right now, especially when tactical trading ideas are dominating flows.

Plain and Simple: the bond market lost it's bid and offer prices were pushed lower and lower to attract buyers. And just like that...poof...three days of positive progress gone in a matter of hours. This isn't necessarily indicative of a major shift in sentiment but it doesn't speed up the QEII cleansing process, it delays us! The bleeding has stopped for now but to restore positional equilibrium we need see these short sellers washed out  followed by some chunky bargain buying.

NEXT EVENT: $29 billion 7s at 1pm