Gold regime change, BTC pullback, and weak Treasury auction

The short covering rally in Treasuries and equities is losing momentum, and I find it interesting that the short end is leading the reversal, resulting in a bear flattening. If the market was truly convinced that a recession is imminent, 2 yr Treasuries would stay elevated in anticipation of Fed cuts, while the long end would lag.

We can glean two insights into this market behavior. First, is that position unwinds of long end Treasury shorts and the unwinding of bear steepeners were the most likely culprits of this month’s moves rather than the actual pricing in of recession. CTAs had a lot of shorts to cover, and now positioning has been reduced to make upside and downside risks roughly symmetrical.

Vanda Research’s CTA forecasts now suggest an equal amount of buying on strength and selling on weakness in 10 yr futures.

Second, the Fed hinted that further hikes might not be necessary if the bond market continues to tighten financial conditions. If financial conditions suddenly ease due to the rally in bonds, the threat of another rate hike returns to the table. This reaction function was further reinforced by Powell and the numerous Fed speakers this week, most of whom stressed that their fight against inflation is not over and that they intend to keep rate high and maintain their hiking bias.

Last night we saw a weak 30 yr Treasury auction that sent Treasuries cratering lower. Comments from Piper Sandler:

*U.S. 30-YR BONDS DRAW 4.769%; ALLOTTED AT HIGH 17.97%. 5.1 BP TAIL

This was the worst 30y auction since the Nov 2021 refunding which tailed 5.3bps with similar stats.

That 2021 auction saw dealers left holding 25.2% of the issue vs 24.7% today.

The charts for the long end of the curve are now looking precariously toppy:

10 yr Treasuries formed a double top and broke support

US 20 yr Treasuries failed to maintain their push to new highs, and a break below 112’16 would do some technical damage