11/10/23 – Strong Hands

In last week’s Weekly Wrap we mentioned, mid-page and in passing, that the Treasury Borrowing Advisory Committee (TBAC) had advised the Treasury to skew borrowing needs away from long maturities to the T-bill sector.  Since then, we’ve been discussing whether the TBAC understated their concern.  They certainly did as yesterday’s disastrous 30-year bond auction showed.  The auction cleared at 4.769%, 5.3 basis points above the 4.716% level at which it was trading at auction time.  That represents approximately a 1% fall in price and a meaningful hit to those that bought the bond just minutes before.  The bid-to-cover ratio, a measure of demand was 2.236%, the lowest since 2021, foreign demand fell, and the dealer community bought 24.7% of the issue, the largest take down since 2021.  In a sense, the large dealer takedown is a blessing for longs.  Paradoxically, when the dealers are holding a big position, they tend to defend it by not selling.  It’s known in the industry as having strong hands.

An hour after the debacle, Chairman Powell threw fuel on the fire in his presentation at the IMF conference.  In it he did his best to walk back last week’s dovish post-FOMC comments.  Specifically, he said that “he’s not confident” that rates are high enough to cool the economy.  Ironically, his comments didn’t worsen the sharp selloff in the post-auction Treasury market.  Again, we attribute that to the “strong hands” of the dealers holding outsized positions of 30-year bonds.  For the week, the 30-year traded as high as 4.81% and as low as 4.61%, after closing above 5.0% just two weeks ago.  The equity market barely noticed the events in the bond market, closing marginally higher for the week, as earnings releases have slowed to a trickle.

Looking to next week, CPI on Tuesday and Retail Sales on Wednesday will likely dictate trading.  The inflation numbers are expected to decline, as are the sales data, as both reverse upside surprises from last month.

Lastly, we would be remiss if we didn’t mention that the Federal Reserve’s reverse repo operation ticked below $1 trillion this week.  As a reminder, the operation was implemented to “mop up” the massive amount of liquidity the government flooded the system with back in early 2020.  We consider this a positive move in returning to monetary normalcy.  We have a long way to go but welcome this milestone.