The sense of illiquidity was palpable today. This began in the overnight session when comments from the European Central Bank sent European bond yields screaming higher. Treasuries would typically follow–at least to some extent–but they barely budged. The problem? There weren’t enough sellers in the market to force buyers to bargain shop (thus keeping prices higher and yields lower than they otherwise might have been).
The imbalance changed quickly at 8:20am. That’s when the a big glut of domestic bond traders begin their trading day–a fact that was readily apparent in CME’s block trade screen. Several massive trades came through at 8:23am, and then again just after the Durable Goods data at 8:30am. This created enough momentum to run stops (force bond traders to sell at stop-loss levels in order to avoid additional weakness) heading into the NYSE open.
Weaker momentum continued all the way up to the 11:30am 7yr Treasury auction. Granted, the 7yr auction is not historically the most important Treasury auction and granted, Treasury auctions haven’t been major market movers for several years. But investors are particularly worried about the current state of global demand for US Treasuries as long-term inflation expectations have been repriced. In that regard, today’s 7yr auction served as an important litmus test.
The results? The auction was more than strong enough to show us where global demand could be found.
The downside? The abundant supply of global demand required 10yr yields over 2.40%.
Rates recovered some of the losses after the auction, but nonetheless ended the day in much weaker shape vs yesterday. 10yr yields were up 4bps at 2.355 and Fannie 3.5s were down nearly 3/8ths of a point at 102-18. Bond markets are closed tomorrow for Thanksgiving, and only open a nominal half day on Friday.