Understanding how bond sales affect 10 year price

[gaussian]

I am trying to get more into treasuries - in particular options on 10 year notes because the IV is juicy at the moment thanks to orange man and China.

However, I am having trouble wrapping my head around current events. First, bond prices move opposite of yields so we'd expected yields to raise as people leave the bond market feeling safe. So as for the recent decline, this makes sense because orange man hasn't tweeted anything controversial in literally a week and there is now hopeful sentiment that we will resolve our disputes with China.

Reading the newswire today I saw the following articles:

U.S. Treasury Department to sell $38 billion of 3-year notes Tuesday

U.S. Treasury yields edged higher early Tuesday as investors prepared to make way for a sizable auction of government paper set for sale later in the day.

What are Treasurys doing?

The 10-year Treasury note yield rose 1.7 basis points to 1.639%, a day after it hit its highest levels in around four weeks, while the 2-year note rate was up 2.2 basis points to 1.597%. The 30-year bond yield rose 1.5 basis points to 2.113%. Bond prices move in the opposite direction of yields.

What's driving Treasurys?

The U.S. Treasury Department is set to sell $38 billion of 3-year notes at 1 p.m. Eastern after yields edged up Monday.

Signs that fiscally conservative Germany may be willing to issue debt to finance increased spending came on Monday after reports said Berlin was looking at ways to take advantage of historically low borrowing costs without triggering its constitutional national debt brake. Germany is limited to running a budget deficit no more than 0.35% of its annual economic output.

Investors are also looking ahead to the European Central bank rate decision on Thursday, where it is expected to announce a raft of stimulus measures. The ECB has insisted it still has the ability to ease monetary policy further amid questions that the central bank has run out of ammunition. In addition, analysts say it's not clear if monetary policy can boost economic growth in a world where debt yields are already negative.

...

US Treasury prices settled well lower Monday, held near Aug. 23 levels as equities rallied with risk-off trade dominating while the long-bond led the drop and the 2-year outperformed.

The market was weighed by increased hopes for progression in US-China trade talks as well as talk that Germany had some "shadow" stimulus plans and expectations for the European Central Bank (ECB) to perhaps lean more dovish at the Thursday meeting.

A full slate of Treasury offerings will be put-up against corporate offerings with higher yields capitalizing on extreme low rate. adding added drag to prices.

There will be $26 billion 52-weeks along with $38 billion 3-year notes on sale Tuesday, Sept. 10, $24 billion reopened 10-year Sept. 11 and $16 billion reopened 30-year bonds Sept. 12.

The market was hit again as July consumer credit hit much-higher-than-expected with the headline at $23.3 billion, the biggest bounce since November 2017 and higher than the $16.1 billion expected, indicating that the consumer has continued to drive the economy.

...

I am new to trading financial futures and derivatives on them so I only have a very simple, mostly theoretical, understanding of them.

Could someone explain to me how these sales are driving prices in the 10 year down considering they are in 3 year and 52 week notes? You'd think the glut of new bonds would drive down yields, driving prices of futures on these bonds higher.

What do they mean treasury offerings will be put up against corporate offerings with higher yields? How does this drag on prices?


What other fundamentals should I be tracking on these to make sure I see the "full picture" of the 10 year futures?

 

[CannonTrading_Ilan]

I am trying to get more into treasuries - in particular options on 10 year notes because the IV is juicy at the moment thanks to orange man and China.
...........

What do they mean treasury offerings will be put up against corporate offerings with higher yields? How does this drag on prices?


What other fundamentals should I be tracking on these to make sure I see the "full picture" of the 10 year futures?

Good points @Guassian - I asked my colleague, John Thorpe, ex floor trader on the CBOT for his input and here it is below:


Fundamental factors such as Bond Sales, Central Bank intervention, Central Banker comments and large price swings in Global Equity to name a few, can all have impacts on bond prices and yields in the very short term to varying degrees, especially if the new information is not anticipated.

Anticipation is the key.

Forecasts of money supply form the basis of supply for credit; forecasts of new debt offerings form the basis of the demand for credit. So if you are forecasting interest rate changes from a money supply standpoint, the fundamental analyst would have to determine if his or her forecast differs from the “expected” money supply. We always have to remember that the market is very efficient when discounting prior expectations, and we need to understand what expectations have already been discounted into the current price already. This is why news driven fundamentals are typically very short term, particularly the “surprises”.

To address your question about 52 week and 3 year notes affecting 10 years I like to look at U.S. Dept. of the Treasury daily yield curve and think about the supply and demand of the interest rate a consumer can receive and the risk associated with the time they can hold it. If I want yield, I can get it in the short time frames, so demand is highest for the shorter durations currently, Like wise , if I am looking for higher yield I may find it in corporate debentures rather than Treasury’s; again, Supply and demand affecting price. As more people demand higher corporate yields, demand for Treasuries are soft and yields will rise for the Treasury’s and prices will tend lower.

In short, supply and demand, market expectations along with periodic surprises affect price and yield in the treasury complex.

 

[gaussian]

Forecasts of money supply form the basis of supply for credit; forecasts of new debt offerings form the basis of the demand for credit.

Thank you for this post and reaching out to your colleague.

Where can I find the data on money supply? Could you elaborate on how these forecasts form the basis of what you suggest? This might be trivial and I apologize. You just seem like a good resource. I'd happily take links/reading material as well.

To address your question about 52 week and 3 year notes affecting 10 years I like to look at U.S. Dept. of the Treasury daily yield curve and think about the supply and demand of the interest rate a consumer can receive and the risk associated with the time they can hold it. If I want yield, I can get it in the short time frames, so demand is highest for the shorter durations currently, Like wise , if I am looking for higher yield I may find it in corporate debentures rather than Treasury’s; again, Supply and demand affecting price. As more people demand higher corporate yields, demand for Treasuries are soft and yields will rise for the Treasury’s and prices will tend lower.

This in particular is fairly interesting.

So the 52 week and 3 year are affecting the 10 year primarily because if there is more credit supply to consumers (banks, etc) in the shorter time frames people will buy those up in order to not "lock up" money for as long. This will cause yields to rise in 10 year (in order to entice people back) send the price of the futures for ZN down. Your comment on corporate vs. treasury makes more sense. They are talking about "issuing it against corporate bonds" because corporate bonds are currently yielding more so people looking for short term higher yield debt may look into corporate bonds and ignore the treasuries.

This clears up a lot but I have a follow up question - if I increase supply of credit by issue a ton more treasuries wouldn't this drive yields down because there are more available - therefore driving the price up? Right now with the new debt being issued 5 year and 2 year treasuries are all falling in lock step with the 10 year. I guess this is because the new debt wasn't issued in these timeframes so part of it is people are leaving to the shorter debt?

Is there a place where I can get more data? This is very interesting. I know where to find yield curve data but I'd be interested in an API or something to capture new debt issuance or something.

 

[bone]

I am trying to get more into treasuries - in particular options on 10 year notes because the IV is juicy at the moment thanks to orange man and China.

However, I am having trouble wrapping my head around current events. First, bond prices move opposite of yields so we'd expected yields to raise as people leave the bond market feeling safe. So as for the recent decline, this makes sense because orange man hasn't tweeted anything controversial in literally a week and there is now hopeful sentiment that we will resolve our disputes with China.

Reading the newswire today I saw the following articles:






I am new to trading financial futures and derivatives on them so I only have a very simple, mostly theoretical, understanding of them.

Could someone explain to me how these sales are driving prices in the 10 year down considering they are in 3 year and 52 week notes? You'd think the glut of new bonds would drive down yields, driving prices of futures on these bonds higher.

What do they mean treasury offerings will be put up against corporate offerings with higher yields? How does this drag on prices?


What other fundamentals should I be tracking on these to make sure I see the "full picture" of the 10 year futures?

How well an auction is received in the market is an indicator of sorts for how receptive institutional buyers are for a particular yield and issue.

It's important to remember that certain institutional investors - namely insurance companies and some pensions are required to place a certain threshold of their assets into sovereign debt. So even if a yield or price seems completely ridiculous to your own personal sentiments, keep in mind that there's a big chunk of captive assets that are required by law or charter to buy sovereign treasuries. Life insurance underwriters come to mind especially.

PIMCO and the CME Educational Section have good information on fixed income securities.

 

[comagnum]

Bonds are catching a bounce off long term support & the futures contracts are inverse. For those that like pictures, this may explain it a bit.

Due to the extremes in interest rates historically, the swings are also extreme.

 

[CannonTrading_Ilan]

Thank you for this post and reaching out to your colleague.
.......

Is there a place where I can get more data? This is very interesting. I know where to find yield curve data but I'd be interested in an API or something to capture new debt issuance or something.

There is a lot of available material on the Money Supply... here are a few links https://www.federalreserve.gov/releases/h6/current/default.htm and https://tradingeconomics.com/united-states/money-supply-m0

Feel free to PM me and I can connect you with John directly if you like.

 

[PromisingTrader]

Is anyone taking advantage of volatility after auction results in Treasuries? Do you consider this an opportunity and what is working for you?

 

[CannonTrading_Ilan]

Is anyone taking advantage of volatility after auction results in Treasuries? Do you consider this an opportunity and what is working for you?

I have tried in the past to place limits away from market with auto bracket in the direction I liked for the market....was 50/50 at best.....