- Strategic Petroleum Reserve (WCSSTUS1): unchanged.
- Total Bank Credit (TOTBKCR): -33B (-0.20% w/w); new 2-year low.
- Fed Balance Sheet (WALCL): -6B (-0.08% w/w); new 2-year low.
- 30-year Mortage Rates (MORTGAGE30US): 7.50% (-26 bp w/w); retreat from 20-year high.
Bank credit continues to contract – along with the Fed balance sheet. That’s a strong deflationary impulse. There was also a big drop in mortgage rates, allegedly recorded by the Fed on Friday. And Wolf Richter reported on Monday [November 6th] of a huge short-covering rally in Treasury bonds in the previous week, which (temporarily) pushed down long-dated yields:
Highest-Ever Treasury Short Positioning by Hedge Funds into Last Week Was “Accident Waiting to Happen,” Massive Short-Covering Ensued, Pushed Down Yields. “Basis Trade” at it Again (Source – wolfstreet);
But then…on Thursday [November 9th], a move happened in the opposite direction. There was a large problem at the 30-year Treasury bond auction. Turns out, there were not enough buyers for the 30-year at the “expected” yield, so the yield had to rise bigly (5.3 basis points – largest “tail” since records started in 2016) in order to uncover enough bids to purchase all the 30-year bonds sold by Treasury.
Long story short: “big tail” = not enough buyers at current yields; tail bigness = size of the imbalance and/or relative lack of buy-side demand.
Stocks Tumble, Yield Surge After Catastrophic 30Y Auction Stops With Biggest Tail On Record As Foreign Demand Craters (Source – zerohedge); “This is a big warning flag because every time we have seen a surge in Dealer takedowns, some sort of Fed intervention – QE or otherwise – has usually followed and we doubt this time will be different.”
So Big Tails are Bad – they are a sign of not-enough-demand. Wall Street was not pleased by this outcome; its immediate reaction (on Thursday) was a sell-off in equities and bonds, although that didn’t continue on through Friday. My guess is, market intervention prevented further contagion. It will be interesting to see what happens on Monday.
And here’s another oddity. The Fed hasn’t updated the DGS10 instrument now for two days – normally DGS10 (and friends) are only delayed by one day.
by davefairtex