Another Week, More Repo Madness

Market-implied inflation forecast is highest since 2014

As discussed in Bloomberg: https://www.bloomberg.com/news/articles/2021-03-08/u-s-bond-traders-stung-by-selloff-eye-inflation-data-auctions

“The 10-year and 30-year auctions on Wednesday and Thursday will be closely watched as litmus tests, with weak demand likely adding fuel to bearish sentiment,” TD Securities Inc. rates strategists Gennadiy Goldberg and Priya Misra in New York, wrote in a note to clients published Monday. “Note that the cheapening of 10s — outright and on the curve — suggests some auction setup.”

What’s to like? Primary dealers are loading up Treasures. Yet, nobody wants these dogs so they pile up on the balance sheet.

And every day, the paper boy brings more. 

Recall barely bid 5- and 7- year note auctions last month thatdrove up benchmark 10-year yields above 1.60% – a in a year.

Tyler over at ZeroHedge covered JPM’s notes: https://www.zerohedge.com/markets/supply-has-become-difficult-absordb-jpmorgan-issues-stark-warning-about-us-treasury.

JPMorgan rates strategist Jay Barry issued a rather ominous warning, and in a note titled “How are outsized changes in issuance impacting auction dynamics?” (available to pro subs in the usual place) he points out that Treasury supply has gotten increasingly more difficult to absorb (and that’s even with the Fed monetizing $80BN in Treasurys every month).

Consider this –

At the same time, buyside demand in the primary market is fading particularly in 5- and 7-year notes and 20-year bonds.

And this is particularly evident in the second week of the month. Like right now amidst a $24 billion offering this month.

Lately, the market has been inhaling duration at a doubled rate.

“Thus with dealers absorbing more than double the duration per month than it did a year ago via the auction, but not warehousing more risk, this is perhaps driving the more variable auction results we’ve seen in recent months.”

According to Bloomberg, BNP Paribas SA is among the banks forecasting the 10-year yield will reach 2% by year-end, but “absolutely there’s a risk that this could happen much quicker,” said Shahid Ladha, head of Group-of-10 rates strategy in New York. “Everything seems to be pointing to a faster pace and bigger magnitude of repricing because the reopening of the U.S. economy and fiscal impulse are surprising to the upside.”

This should be interesting.

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