Level: Treasury US has become a ‘pain trading’

US treasury results have been lined up even higher – what happened?

The impact of the tariff is a discount for recession and more interest rates, usually considered a good reason to buy bonds. It’s still, and can be in the coming months. But for now, we have gone in another direction. The price of treasury bonds has been intimidated lower in the last few days, and the results have jumped higher, not what is usually expected in the development of material recession risks.

So what is driving this? This is the way we see it.

First, the idea that is troubling ‘Selling America Inc.’ The narrative here is centered on frustrated players who sell Treasury for various reasons. It’s hard to get a size about this, and by the way, it doesn’t have to be sold by foreigners; This can also be from domestic. The incident can be political (for example talks about sales by Chinese players), but it can quickly develop into a relative value game where treasury is anticipated to fall in price, so that more sellers arise, deepening problems.

Second, while the risk of recession argues for a lower market level, other main macro factors point to the other way. The two biggest is the price increase derived from the tariff, and the fear that the fiscal deficit is not handled. This turns into a risk of inflation and the risk of supply pressure. This has been hiding in weeds for some time but still a reasons that mean treasury sharing to test the positive side.

We sent a piece of impact because the tariff story was completely broken from April 2 and so on. Here. We noted bullish encouragement on treasuries about the risk of recession, with the results of treasury 3.5% 10 years which might be possible if we enter the tendency of recession through the second quarter. But we also note that ‘this is complicated. ‘We have a previous call for 5% on 10 years. We never removed it completely from the table, and we have swung back in that direction as a central call, possibly as a risk when we arrived at the end of 90 days at the tariff.

The deeper in the weed market driver – there is a lot that needs to be taken into account

We also need to combine background talks (semi-forced) exchange century bonds and/or user costs (effectively the tax of external holders) on treasuries, which clearly paint negative foundations for holders. See more here. As we have noted before, the treasury holder does not want drama; They want simplicity, as a means to find heaven from ‘risk products’ when everything looks bad. The last thing they want is a complication. The famous Mar-A-lago report is one of which the complications are heralded at least for discussion.

As a timely market barometer, auction 3 years ago last week ‘tail’ with a bad, with nearly 2.5bp. Effectively came to a concession of that size to the secondary market. The important thing about 3 years is maturity that tends to be a global central bank, and they tend to like short dates. There is an echo here from the agreement mentioned above. It is difficult to say whether this is a driver, but however, his request is very bad for the classic flight-to-saving area of ​​the curve.

We also note that the US 10 -year exchange spread has been fired to 60BP (graphics above). That’s a cheaper material in Treasuries versus the SOFR risk free rate curve. This is very unusual during classic flights for safety, as in the case of Treasury will be rich in a relative sense. In fact, that is what happened in Europe, because 10 years of German spread spreads has fallen relative to the Estr curve (tightening SPREAD SWAP). The fact that the Ministry of Finance has seen the opposite occur in describing a negative picture of direct treasury sales. Euro zone core bonds have behaved more like classical safety games, producing broader spreads to the US. Expect this theme lasts in the coming months.

Returning to the US, Margin calls for a very leverage player has become a discussion point in the market. The idea here is that many Vanilla players use Futures to express their exposure to the treasury. Many hedging funds capture the premiums produced in the distribution of time to cash, and by doing that, eventually funding utilizing the longing of Treasury in Repo. If the price of treasury drops is sufficient, margin calls can require liquidation, strengthen the effect on the treasury market. The point is the possibility is not a catalyst but of course the underlying factors.

This system lasts even with the results, but there are limits

Obviously, there is a wild extreme potential in the game here. If we enter the recession, there is a path there for results to return to lower. But here and now is painting the Ministry of Finance as a polluted product, and it is not an uncomfortable area. And not for Trump’s administration that has fought for the previous fall in the results of treasury as something to be held as a positive offset of tariff narratives that injure risk assets. Well, it seems nothing more. Treasury is also proven to be a pain trade.

The big question now is whether the federal reserve comes to save. This will only happen if there is material pressure on the system. So far, the system is functioning. Liquidity decreases but can be tolerated. Possibly, things must get worse before Fed enters. If they do it, it will go through intra-meeting rate. There has been a conversation about Fed who came to buy Treasury. Once again, the reason to do this is still not enough there. We feel that there will be tolerance up to 5% in 10 years before Fed may feel obliged to do something. But this is a fast moving space.
Source: Ing