The Week Ahead: Sparse Economic Data Leaves Focus on Auctions, Tradeflows

We use the term "tradeflows" somewhat loosely to refer to the broader phenomenon of market participants opening and closing long or short positions.  For example, an insurance fund or large asset management firm might have opened a new "short position" as rates began rising.  When rates break through a certain target and then fall back below that target, the account with the short position would then "cover" or buy back the bonds they sold short when rates were lower.  In this sense, "short-covering" is "profit-taking."  This is one way that tradeflows can step in to stop a sell-off.

Another way is when new "long positions" are taken out by market participants with cash that they'd like to put to work.  Those accounts may be waiting for similar price and/or yield levels before deciding it's time to take out a new long position in the hope that rates will fall (or prices will rise).  Eventually, such long positions would be closed out when prices reached the investor's target, or rather, when they hit the target and then fell to a stop-loss level.  

In other words, if you bought something for $100, hoping for prices to rise to $110, you might not necessarily sell it immediately at $110, especially if it's next move is to $111!  But with each move higher from the target, most traders will have some form of a "stop-loss" in place in order to minimize losses from prices moving against them, but while still staying flexible enough to capitalize on additional gains past their target.  

The preceding are two examples of tradeflows.  They exist in all markets and aren't only important for the traders who are actually opening and closing their own positions, but also for every other trader interested in a particular market to observe and get a sense of what's moving money!  Tradeflows themselves can be the result of preferences, assumptions, insights, ideas, and goals on the part of human beings.  They can be the result of necessity, balance-sheet constraints, legal issues, portfolio allocations, and liquidity needs on the part of large firms.  Or they an be the result of technical and algorithmic trading that seeks to capitalize on trends, continuation/reversal signals, and even complex systems that consider other market levels and news headlines.

Bottom line, "tradeflow" is a catch-all term that references everything happening "behind the scenes" in the trading world.  For example, seeing MBS Prices or 10yr Yields move a certain amount of 32nds or basis points is something that we can observe on this site.  But there are so many reasons those moves could be taking place, and while those reasons are occasionally easy to see, other times they could be the result of certain types of accounts closing or opening certain positions with other account types adjusting their own positions in response.  That's not the kind of information that can be conveyed with a simple "+0-04."  

Getting back to the headline...

The week ahead is limited in terms of economic data and events, and while the Treaasury Auction cycle will provide some guidance for bond markets, the first significant auction isn't until Wednesday.  On that same note, the small amount of economic data doesn't offer a meaningful report until Thursday!  As such, tradeflows will be a big consideration for the first day or two with auctions and data coming into more focus on the last 3 days of the week.  10yr yields will be attempting to bounce back from daily closing highs in the mid 1.91's after hitting intraday highs of 1.961 on Friday.  The equivalent mark for MBS is 104-00 in Fannie 3.0s (based on January MBS.  February prices are lower and will take over on Friday morning).