Carnage Continues

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Includes: EGF, FTT, GOVT, PLW, TAPR
by: John Jansen

The carnage continues in the Treasury market with 10s making new yield highs for the year. The folks with whom I converse actually have reported better buying by real money accounts and one market maker of Long Bonds says that real money has substantial interest in Long Bonds behind 3.10. I will venture a guess that the interest is good till close.

The culprit seems to be the crazed crowd of convexity based clients who need to hedge mortgages. The several participants with whom I have spoken have all reported some sort of hedging activity by that gang. In my experience that trade usually lasts several days but if it is happening then this ugly iteration is nearly over. By definition that group is always the last one to buy or sell.

The movement on the yield curve would affirm that those folks are hedging as their activity is in the belly. The 2s 5s curve has steepened to over 100. The 5s 10s 30s and 5s 7s 10s and 2s 5s 10s are each getting crushed which would indicate that the belly is under siege.

The next question is what happens next. I lean to the view that if we get strong data on Friday morning and a quick break in 10s back towards 2.45/2.50 that we will see buyers and significant curve flattening with the Long Bond outperforming its yield curve cousins.