The Day Ahead: 3yr Auction Potentially More Relevant this Time

News

Negative sentiment for broader bond markets came out with both guns blazing this week as the pre-NFP range that frustratingly continued to be the post-NFP range on Friday (“frustration” because it added to uncertainty between NFP and the FOMC Announcement next week) was promptly challenged with a move into the 2.2’s for 10yr yields.  Today’s charts will continue to focus more on Treasuries as MBS charts will be distorted by the roll tonight.

What’s “the Roll” again?

(Skip this section if you don’t need the refresher).  For the sake of disambiguation, “roll” is also commonly used in the MBS market to refer to “dollar rolls,” but on this publication, “the roll” will almost always be a reference to Class A Notification Day, which is the last day of any given MBS settlement cycle for Fannie/Freddie 30yr Fixed before prices are derived from the following month coupon.  In english, that means that MBS prices for Fannie/Freddie 30yr fixed are currently based on June MBS.  After tomorrow, June gets all packed up for delivery and we switch to July being the most current pricing.  This makes it look like prices “drop” even though we’re simply switching our lens.  The unfortunate side effect of the roll is that it distorts efforts to apply technical analysis to MBS because the apples look less like apples around this time of the month. 

Today brings only modestly improved data activity vs yesterday, which brought none.  Wholesale Sales and Inventories at 10am is seldom a market mover.  It can have an effect, but it’s never a game-changer (and just as often as not, has no discernible impact).  The 3yr Note auction at 1pm is the first one in a long time that we’re actually mentioning as a potentially market moving event.  That’s because a 3yr time frame is now more decidedly at risk of being in the time window that sees Fed lending rates rise from their long stay at 0-.75%. 

That policy firmly nailed the shortest end (overnight repo market) of the yield  curve down, making 2yr and 3yr auctions largely a housekeeping issue and not much susceptible to strategies potentially uncovered by auction bidding details.  We’re getting closer to that no longer being the case.  Maybe this one is the one, but even if it’s not, we’ll entertain the possibility any time the circumstances are similar. 

Charts of the Day:

Yesterday’s volume was low, but the yield movements were disconcerting from a technical standpoint.  Top section is an updated view of the same long term uptrend in yields that’s been on most recent Treasury charts.

The other way to look at daily closing level in Treasuries is as an ominous triangle of death heading into next week’s FOMC festivities.

Leave a Reply