Hey bub, I slice down and give you the scoop on the bond markets. My views are my own and do not constitute investment advice
New York, NY
Joined December 2015
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Stocks especially the Nasdaq was already beaten up heading into midterms. The odds of a Dem sweep kept climbing. The initial selloff made sense and likely driven by foreign investors during the overnight session. Then when the uncertainty cleared , the buyers came in.
Rates go up, swap spreads widen.
Rates go down, swap spreads widen.
The marginal driver of swap spreads is really swaps flows. When rates go up, there is an accompanying pay fixed swap flow that exerts more pressure and pushes spreads. When rates go down, there is an
Trading in basis has generated alpha this year. Ultra long nets were clearing at 2 ticks,
Now they’re 7 ticks. You do the math
The selloff in Treasuries isn’t occurring in vacuum. Global bond yields are selling off across the world and this is a result of debt binge post pandemic when governments printed like there was no tomorrow and created too high inflation that is being exacerbated by the oil shock.
The Fed hiked 25bp. I did not think there was any doubt they would hike. The counterfactual would have been and the market reaction more violent in the bond markets. Now it restores the Feds credibility and Warsh stance in his unwavering effort to restore price stability.
The buyback results seemed disappointing but that’s because participants didn’t submit prices that were aggressive enough for the Treasury. The Treasury isn’t going to lift any price. It has to be reasonable. Overall the selloff today was more so driven by outside forces.
Buybacks sized were 6bn for 9/10 and at least 4bn for the rest of the quarter for the long end. This gives the Treasury flexibility. Why corner yourself to a number? Market was disappointed on the news as long end rates sold off and curve steepened. However swap spreads came back
Need to clarify a few things on Treasury buybacks. The Tsy buyback off the run securities but exclude on the runs, securities that have not reached its first coupon payment, cheapest to deliver securities in futures contracts, as well as those who command repo specialness.
And if you follow the buybacks as closely as I do like the ones in the 10-20y bucket, it’s exclusively been in securities in the 2040 and 2041 maturities. Why? Maybe because those are the securities where participants sell at a price below prevailing market prices.
So even if Tsy upsizes to 10bn, they don’t need to buy all that back if the prices submitted are off base
#Treasuries
The next Treasury buyback for the long end (10-20y) will be on 9/10. The Treasury has not announced the tentative schedule. When they announced the increases in August, they said the long end maximums would be at least 4bn
It’s possible they wait until a day or two before in case there’s another selloff at the long end. I am thinking they go a bit larger 5-10bn. Remember, they don’t have to buy all of it. It’s an option
#Treasuries #Buybacks #Bessent
Warsh talked tough in his first Jackson Hole speech and odds of a Sep hike is higher but what really changed in the landscape over the past few months. Inflation has been above 2% and underlying trends have not improved. This was no different in July and while he talked tough