Treasury sells 20s today, Fed buys them tomorrow
August 19, 2020
–Quiet session in rates yesterday; tens eased 1.5 bps to 66.7 and the curve edged flatter with 2/10 at 52.4. While volumes across the board were light, there were a couple of large lifts on the dollar curve with associated jumps in open interest. EDZ0 added 35k in open interest with new buying at 9972 (perhaps a fade of turn pressure) and EDZ22 added 9k in OI with buys at 9973 (settled 9974). August ED contract expired Monday at a price of 99.7322. As an indication of just how moribund the market is, I bought EDM1 9975 puts yesterday for 3.5 bps. EDM1 is now the highest contract on the curve at 9981, but there are 300 days until expiration and libor continues to set at 25 bps or higher.
–Today features a treasury auction of $25b 20-years and the FOMC minutes. Possible discussion of inflation averaging? In spite of a relentless bid in stock futures, treasuries are also up this morning, even though last week’s 30 yr auction seemed to indicate waning demand for long paper. Today’s NY Fed buying consists of $1.2 billion 7 to 30 year tips, and tomorrow $3.6 billion of 7 to 20 year treasuries. Once again, the ten year tip ended below negative 100 bps at -102. I marked the ten year breakeven at 168.6, a new high. Treasury rolls picking up somewhat with about 3% of tens having rolled into Dec.
–Yesterday’s housing starts showed an eye-popping 22% gain with associated new highs in home builder stocks. A part of the explanation is the flight from cities; I spoke with a friend who works for Wells who told me that 200,000 of 260,000 employees are now working from home.
