Treasury update

I am bearish on treasuries long term, but in the short to medium term, I'm not sure investors will have many alternatives, especially as the euro denominated debt continues to pose currency, liquidity, and solvency risks. Then there is the issue of implementation.Viewing the remainder of this article requires a Subscription

Euro and Pound

It’s been relatively quiet on the equity front, even with the market going up – but the currency front continues to be a big focus.

The euro continues its slide:

I’m still amazed that the yen has continued to stay strong, but I guess this is part of unwinding various carry trades. Still, I can’t help but think that once those unwinds occur, the yen will completely fall apart. (Short yen positions.)

Today, though, the story is GBP. The pound has been weak recently, but not as weak as it should have been, and today it looks like the pound is showing increasing signs of stress:

These moves are providing some support to the Treasury market with safe-haven buying, but we’re wary of the long bonds for security. So are other people, with gold as the original safety outlet, and now silver looking like its receiving some of the flows.

We’re maintaining our positions in silver, gold, gold miners, palladium, and platinum, along with our short euro, short yen, and short treasury positions.

More on inverted swap spreads

The inversion of the 10 yr swap spread (10 year swap spread = 10 year LIBOR yield – 10 yr UST yield) might be the biggest under-reported story since…well, so many big stories out there…

ZeroHedge ran a summary of a report by Morgan Stanley and they did such a great job, that I won’t try to do better, but rather, encourage everyone to read this article.

One line from MS:

The issuance of UST debt is dwarfing Libor-related issuance. For example, we expect UST net issuance to be $1.7Tr and net issuance of MBS to be zero. Thus, the relative issuance of UST’s vs. Libor-based products mainly accounts for the inversion in swap spreads. This is a first sign of stress leading to higher UST yields and is not to be missed. (Their emphasis.)

Treasury auctions 30-yr at 4.72%

Not a good auction. Emphasis mine…

NEW YORK (MarketWatch) — The Treasury Department sold $16 billion in 30-year bonds on Thursday at a yield of 4.720%, a little higher than traders expected. Bidders offered to buy 2.36 times the amount of debt being sold, compared to an average of 2.24 times at the last four sales. Indirect bidders, a group of investors that includes foreign central banks, bought 28.5%, compared to an average of 39.8% of the last four sales. Direct bidders, which include domestic money managers, purchased another a record 24.1%, versus 10.4% on average. Treasurys remained lower, under pressure before the auction amid easing anxiety about the European Union’s willingness to aid Greece if necessary. Yields on 10-year notes, which move inversely to prices, rose 5 basis points to 3.75%.

http://www.marketwatch.com/story/treasury-sells-16-bln-in-30-yr-bonds-at-4720-2010-02-11-13990