30 yr Auction Musings

The 30 year was a tad sloppy. In my opinion, the reason was a paucity of shorts. The role of shorts in the marketplace is an important and politically under appreciated force. The high correlation and diminished distribution of supply in many markets exacerbates the corrections.

As Livermore stated 2 generations ago, shorts are necessary because they buy in declines. The flip-side of the "everybody in the pool" commodity trade and then regulating/ margin hiking out is the violent lurches back in the other direction. The slightest glimpse of the activity was evident yesterday in Treasury placement. Curve structures and duration moves facilitated by historically low finance rates had made FI shorting an expensive and futile hobby. As summer moves in, we believe the role of procedural shorts will grow in importance.

The reduction in QE after a long time on the needle should help balance the process. QE, like going through the looking glass, distorts perception. When trying to paper over a debt crisis, perception is important. Players receive heavy  incentive to function from the long side, when their traditional role is the opposite. High "submitted" numbers during POMO 6 tell me PDs are anxious to exit "Wonderland" with their heads intact. One thing I know for sure, debt ceiling, deficit, budget or taxes - there is plenty more coming to gear.

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