Very thin trading volume in 10yr. treasuries in yesterdays session. Volume on the Mar. contact of 566,675 was only 62% of the average over the last 6 trading sessions (910K/day). Open interest was up around 10K. Total call volume vs. the Mar options in 10’s was 16.8K most of which 11.7K was in the 119 call, which again were being shorted in yesterday session. Mar. puts traded 46K with a number of strikes between 114 and 116.5 attracting most the trade. Players sheet indicates 2 way flows there.
Current price action quite robust with prices reaching 118’05 around 11:00 p.m. Monday night. Sources in Europe not weak Asian equity markets and the buying in treasuries was described as “hot money” vs. real, or long-term buy and hold institutional type. Prices have remained firm in the European session helped by a weaker GDP report out of the UK this a.m. The headline number was only up .1% vs. a forecast of .4%. Prices traded up to 118’07 vs. the Mar. 10yr.. With Mar. 10’s trading around 118’05 currently cash yield looks to be 3.56%. Again on the broader picture this is now just 6 basis points away from what many view as the current lower boundary for rates in the 10yr. sector of the curve. The upper boundary would be 4%. Chart below shows nearest futures contract on a weakly outlook and the lower chart is the corresponding cash yield. I will expect 3.50% to hold for now, the auctions this week could indeed see good demand and we could certainly test that level. Getting to 3.25% might not be doable as treasury buy back program has “officially ended”. Whether or not other hands are in government sponsored or otherwise will determine if enough demand surfaces here to take yields lower than 3.50%.
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