The fixed income market is heating up as both the buy- and sell-side prepare for increased trading given the volatility of crypto and lack of alpha in equities. Societe generale shared with Traders Magazine its latestFixed Income report, authored by Head of U.S. Rates Strategy Subadra Rajappa.
In the report, the firm shares its thoughts on all things fixed income and highlights the following:
- An analysis of positioning in futures contracts shows significant out-of-the-money (OTM) shorts in the FV and TY contracts. We also see large in-the-money (ITM) shorts in TU and TY contracts.
- ICI taxable bond funds had an estimated net inflow of $2.7bn for the week ending 16 May.
- Treasury ETFs from iShare saw $0.1bn of net cash outflows for the week ending 25 May.
- The currency-hedged 2y Treasury yield pick-up for JPY is down to its lowest level since mid-April after reaching a multi-month high around mid-May.
- Japanese investments abroad amounted to JPY949bn for the week ending 18 May. Japanese investors sold JPY0.43tn of US sovereign long-term bonds in March.
Also, SocGen reported Fed custody holdings decreased by $5.5bn to $3.03tn for the week ending 23 May. This is the lowest level since January.
It also included and reported it thoughts on the month’s Treasury activity.
Treasury auction allotments in April
The $30bn, 3y note auction in April did not go well.
It was awarded at 2.45%, tailing by 0.1bp compared with the 1pm when-issued (WI) yield, and the 2.85x bid/cover ratio was the lowest for the sector since November, indicating weaker demand despite the cheap outright yield level. The increase in the auction size was a negative for the auction. The 42% award to investment funds was their highest for the sector since January, whereas the 14% award to foreigners was their lowest since
The $21bn 10y note auction in April did not go well.
It was awarded at 2.795%, tailing by 0.5bp. It was the first time since November that a 10y auction yield was lower than the previous months stop. The 2.46x bid/cover ratio was lower than previous months 2.5x, indicating weak demand. Foreign investors 13% share of the offered amount was their lowest for the sector since September. Investment funds share dropped to 45% vs the previous months 47%. Dealers took 42%, their highest share of the sector since September.
The $13bn 30y bond auction last month went well.
It was awarded at 3.044%, stopping through by 0.1bp. The 2.41x bid/cover ratio was the highest since January, indicating stronger demand, though the sector was costly in outright levels, resulting in a lower stop than the previous two auctions. Investment funds 60% takedown of the offered amount was their highest share of the sector since January, while foreign investors cut their share to 13%, their lowest since January.
The Treasury auctioned $32bn of the 2y note in April, which was awarded at 2.498% vs the 2.493% when-issued (WI) yield at the bidding deadline. It was the highest 2y auction stop since July 2008. The 2.61x bid/cover ratio was the lowest since December, indicating a drop in demand among foreigners (10%), which took their lowest share of the sector since September, whereas investment funds took 44% of the offered amount.
The $35bn 5y note auction in April tailed with the auction stop at 2.837% compared with the 2.838% 1pm WI yield. It was the highest 5y auction stop since September 2008. The 2.49x bid/cover ratio was lower than the previous 5y note auction. Investment funds 56% share of the offered amount was their highest for the sector since September, whereas foreign investors 10% was their lowest since September (see Table 9 and Graph 28).
The $29bn 7y note auction in April was awarded at 2.952%, stopping through by 0.6bp compared to the 1pm WI yield. It was only the second stop through for a 7y note auction from the past since October. The 2.56x bid/cover ratio was the highest since January, indicating a pick-up in demand. Investment funds 62% share of the offered amount was their highest for the sector since January, whereas foreign investors 14% is the lowest since December.