Today the US Treasury auctioned 21bln 10yr notes (re-opened the Nov-2023 issue).
Going into today’s 10yr auction, ever since the NFP number at 8:30am on last Friday, the US treasury market has been in short covering mode. There was a markets survey that indicated the active trading participants in the treasury market were extremely short (by over 30% which is huge) a full week before the NFP data was released, and the short position continued to build as we approached NFP. The NFP number was strong (+200k jobs) and so the mkt immediately repriced lower as you would expect. However, the important piece of information was not the NFP number…no, the important information was the mkt’s aggregate position (very short going in), because in the end, it is positioning that drives trading activity. So, what would you expect this large community of shorts to do after the market dropped in their favor because of the strong NFP data? If you said “cover their short by buying the market,” then you would be correct.
Normally (in the past), this type of short covering event would take place in a single day. However, because this net short position took multiple days to develop (since Dec-1), and was so widespread (not only was the short position large in size…but it was large in the number of participants that were involved), the following short covering rally has taken a full 4 days to work thru the market. I can say with confidence that now, that large short position has mostly been covered. This does not mean the market is long…this just means that the market no longer has an embedded short position that needs to buy to cover.
From all our lessons on market behavior, we know that when the last short covers (is done buying) the market stops going up (no more buying) and falls back down to around where it all started. I think we’ve just about seen that.
So, the question to ask is “now what?”
Tomorrow we have the 30yr bond auction, and next week the 2yr, 5yr and 7yr auctions. So, the market will need to reset those shorts to absorb the upcoming supply.
I could say a bunch of other fluff to fill space, but that really is all there is to it. The mkt must have a certain amount of short position embedded to make room to buy the supply (auctions), and so, i expect a pop in the market to be sold to facilitate that supply process. If the market does not “pop,” thereby not enabling the market to get short again, then i expect last minute setup selling, and perhaps another tail in the 30yr auction tomorrow.
That’s about all the strategy I have for now. Levels will be available on the private twitter stream.