Repo at Zero Means Bill Gross May Be Mr. Right Now

• Posted by Greg Harmon
• on April 14th, 2011

There have been several stories over the past few days about how the very short end of the US Treasury curve is at zero percent. Well not exactly zero but 1 or 2 basis points. From my repo trading days I recall that around Tax day the Treasury is flush with cash so there may be a seasonal reason for this. Also with the Treasury now buying so many of their securities back via the POMO maybe that is playing a role. Many have written articles offering their explanation, some of which are below. Let me pose one based in technical analysis. The two charts below show the 5 year and 10 year Treasury Yield Indexes.

Notice that both charts are showing potential inverse head and shoulders patterns. Both show that the head is where it bounced off of the 100 day Simple Moving Average (SMA) and if the indexes bounce there again the right shoulder will form. The pattern would then complete on a break of the neckline. Discussion of rising yields on Treasuries has been around for several months. Since the printing presses started inflation pressures and currency devaluation have been driving them. But they have manifested in Long term Treasuries sooner as shown in the chart for TLT, the 20 yr Treasury ETF below. The price on TLT has been in a downtrend, meaning the yield has been rising, since the Fed announced in their September minutes that they wanted inflation and were going to get it through devaluing the dollar. The move in 10 year paper started in October and the 5 year in November and these head and shoulders patterns can also be seen as consolidation at resistance.

What is interesting is that the yield creep is walking down the curve. It may not seem a big deal that the overnight rate is 2 basis points down from 12 basis points. But it may reflect a an increased preference for short term holdings to avoid falling prices as yields rise. Then later to invest that liquidity in longer term holdings when the yields have stabilized, locking them in for a long term. This happens often with Treasury traders moving between 5 year and 30 year maturities. The walk down might be a reflection that the devaluation and debt issuance escalation is now becoming a material concern on a much shorter timeframe. The charts suggest it is. If this is the case then shorting Treasuries now could be the next ‘Big Short’.

Related stories:

From Barry Ritholtz The Repo Carry Trade

From ZeroHedge With GC-Repo Carry Over And FX Carry In Doubt, Are Traders Forced To Ride The Curve For Trade Funding (Butterfly Spread)

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

If you like what you see above sign up for deeper analysis and trading strategy by using the Get Premium button above. As always you can see details of individual charts and more on my StockTwits page.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus