Brace For A Blockbuster 10Y Auction

Brace For A Blockbuster 10Y Auction

One down, one to go.

While this morning’s muted CPI print calmed traders who were on edge that we would see another multi-sigma beat to expectations, and sparked a violent if brief marketwide short squeeze, the main event on today’s calendar is today’s $38BN 10Y auction at 1pm, where memories are still fresh of the catastrophic 7Y auction from Feb 25 which launched a frenzied stop loss liquidation across the yield curve and pushed the 10Y sharply higher by 10bps in seconds, above the 1.50% key level and as high as 1.61%.

Yet unlike two weeks ago when in addition to mounting reflation fears and key threshold levels just begging to be “stopped out”, not to mention atrocious liquidity…

… the situation now is vastly different.

In addition to yesterday’s smooth 3Y auction which will serve as a psychological tailwind, JPMorgan writes that “outright and relative valuations near their cheapest levels in years and largely normalized liquidity conditions will help.” Then there is the modest concession, with the 10Y trading slightly cheaper on the day (was trading much cheaper until yields tumbled on the subpar copre CPI print). Then there is the cash yield which at 1.54% is near the cheapest levels of the year on the 7s10s30s fly, which BBG notes is a “possible source of relative-value demand.”

Another reason why we expect impressive buyside demand: on an FX-hedged basis, the 10Y is now far more attractive than either bunds or JGBs so pension funds looking for FX-hedged yields will sooner or later make their way to the 10Y TSY.

But the biggest reason why we are quite confident that today’s 10Y auction will be described as “stellar” and “blockbuster” is also why we have been warning for the past week that the repo market is very much broken:

As we reported most recently on Monday evening, the “Repo Chaos Continues” the 10Y had continued to trade ominously “broken” in repo, at or near the fails charge of -3.00% every day of the past week, which as we explained meant that there were so many shorts that they could not find deliverable on-the-runs which to use to cover their shorts.

In other words, just as the collapse of the 3Y repo rate ahead of yesterday’s auction served to boost demand and force covering into the primary market…

… so the continued unprecedented repo squeeze in the 10Y means, that there is a massive short base which we are virtually certain will use today’s auction to cover.

And while the pressure eased modestly on Tuesday when repo closed at -0.20%…

… the daily repo rate for 10-year Treasuries was offered at -2.85% at the open according to Oxford Economics and was last seen trading -2.15%/-2.35% with an average of -2.72% on $14.2BN in volume, according to Brean Capital.

Which means that as we noted earlier, all signs point to a mirror-image of the recent dismal 7Y auction…

… with the collapse in repo virtually assuring blockbuster demand and a stop through of as much as 1 basis point if not more when all is said and done. Finally, it goes without saying that a blockbuster auction would have very soothing effect on all risk assets which continued to trade nervous ahead of today’s 1PM main event.

Tyler Durden
Wed, 03/10/2021 – 11:42

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