Yesterday marked "the roll" for 30yr fixed UMBS (what's this?), but that's not all that was rolling.  The proverbial "good times" began--well, you know... after one of the strongest 10yr Treasury auctions in decades yesterday afternoon.  Now on Thursday, we're watching 10yr yields struggle to avoid losing more than 3-4 bps.  Did the good times already stop rolling?  

It's a bit more complicated than that.  First off, it's important to note that the strength of yesterday's auction had a lot to do with a few uncommon factors.  The first is the fact that auction day happened to fall at the end of 5 straight days of heavy selling--the kind of 5-day streak that we only see a few times a year.  As we discussed earlier this week, these sorts of streaks typically result in a friendly correction on day 6. 

In addition, there was extremely heavy corporate bond issuance in the first 2 days of the week.  The firms that run the books on big corporate bond offerings can effectively lock the rate for their client (the big corporation issuing the bond) ahead of time by selling Treasuries short.  In cases where Treasury prices fall significantly between the time the bond offering is announced and the time it is finally priced, the issuer may decide to buy back the hedge.  In other words, some accounts had been selling Treasuries (on behalf of companies issuing bonds this week) and yesterday's auction provided a good opportunity to book profits on those rate locks.

Last but not least, overseas yields among other large economies with risk-free sovereign debt have been running much lower than US Treasuries--especially in the past week and especially in Europe.  The recent yield spike was a buying opportunity for overseas investors.

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Viewed in this light, yesterday was more of reaction to things that had already happened as opposed to evidence of a new trend getting underway.  New trends will depend on data, covid, and the Fed.  We won't get the more important updates from the Fed until the end of the month, and there are no big-ticket economic reports on tap for the rest of the week. 

As such, covid numbers are being scrutinized by savvy investors.  Everyone else is trading corporate bonds and Treasury issuance.  To that end, this afternoon's 30yr bond auction provides another opportunity to see some volatility, but still without a strong comment on whether or not the good times are rolling.  The point is that yesterday didn't even necessarily mean good times were rolling in the first place.