We have two big auction days for Treasuries coming up. The 10 year note on Wednesday and the 30 year bond on Thursday. The thirty year is the big one that makes everyone nervous. It’s a barometer for the willingness of other countries to service U.S. debt. There is intense pressure on this and the question is, “Will China continue to float the U.S.?” (see prior story)
There is a way to play the ETFs for a quick profit. Here’s how to place resting bids on Treasury auction days (calendar).
The various Treasury auctions happen once a month at 1:00 p.m. ET. The notes range from 4 weeks to 30 years and their auctions are spread throughout the month.
Let’s use last week’s auction as an example for setups. Sometimes clear levels of resistance are made before the auctions. One can then place a low risk buy-stop-market order above the day’s range, right before the auction happens.
So we don’t know which will pop TBT or TLT. These ETFs track the 20 year Treasury bond. They are the most liquid and popular way to play Treasuries. TLT is long the bond and TBT is short.
Place a resting buy-stop-market order on both names. The name that pops will trigger the order. This won’t catch the entire move, but it’s a low stress partly automated way to make money. It also saves focus to manage the exit. Exits need to be on the same time frame as the entries. The risk of holding these trades past 30 minutes is large. The idea is to catch the first big impulse move and get out.
These are 3min charts on TBT and TLT for the same two day period last week. You can see that TBT would fill for a quick profit and TLT would never fill. So you only have to manage the winner.
TBT
The green arrow indicates the resting bid. Brokers call them different things. Some are called buy-stop-market orders. When the price is touched a market order is executed to buy. This assures an immediate fill. We want to catch the impulse move.
Say an order for 500 shares of TBT was placed at 52.75. This is $0.05 above the day’s high. We want a little wiggle room to lower the risk of being faked out. Price must get an impulse move to execute the order. It fills 52.80 at the market. The move stalls 10 minutes later. A sell at the market around 53.55 is $375 profit.
TLT
These resting bids are placed at the same time on TBT and TLT. We’re looking for a new high to enter the trade. TLT didn’t work that week. No big deal. The order never fills and focus is shifted to the one that did.
Background Manipulation
Here is more of the bigger story underlying these trades. GTM wrote about this last March (see story). This is old news, but nothing has fundamentally changed. Here is a snippet:
President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures. We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried. -Wen Jiabao 03/13/09
On Sunday Bernanke does the first national interview a Federal Reserve chairman has ever done in 96 years. He says everything is fine and we’ll be back to business as usual by the end of the year. Then on Wednesday the Fed announces they will buy Treasuries until the end of days. So…
- China warns about the financial stability of the U.S.
- Bernanke goes on national television
- Says he’s from Main Street, just like you and me
- Then boldly lies about the economy
Three days later…
- FOMC announces a final push of a desperate crisis management plan
- U.S. dollar sees its 3rd biggest one-day decline ever
- Fed is now matching all of China’s $1 trillion in Treasuries
The Fed Buys Last Week’s Treasury Notes
Chris Martenson just exposed the way the Fed buys Treasuries under the table (see story). Here is a snippet:
Good grief! Just last week, when the auction results were announced it was trumpeted to great fanfare that there was “more than sufficient” bid-to-cover, “strong demand” and all the rest. And now it turns out that 47% (!) of the bonds that were taken by the primary dealers in that auction have been quietly bought by the Fed and permanently secreted to its balance sheet.
They didn’t even wait a full week! A more honest and open approach would have been for the Fed to simply buy them outright at the auction but this way, using “primary dealers” and “POMOs” and all these other extra steps the basic fact that the Fed is openly monetizing US government debt is effectively hidden from a not-too-terribly inquisitive US press and public.
The speed of the shell game is accelerating.
This immediate repurchase of newly auction bonds by the Fed tells us that demand for these bonds is not nearly as high as advertised, and that things are not quite as strong as represented.
Caveat Ursi 3.0
Mole at EvilSpeculator has been following POMO activity for a long time. He drew up an awesome chart showing each burst of virtually free money the Fed pumps into the market (see story). It’s not free to you and me. We pay the interest on it through inflation. It is essentially free to prime brokers who use it to gun index futures while everyone is sleeping.
As you are probably aware I have long been keen on learning more about the inner workings pertaining to the NY Fed’s repo auctions and I have occasionally reported on the slosh available to preferred primary dealers. After a very pertinent article posted by ZH earlier this week I carefully combed through the recent POMO calendar, which due their traditional rarity I had foolishly ignored for several months now, and to my surprise arrived at highly interesting results:
Coincidence? You be the judge of that – I however took the liberty to highlight and mark each day a POMO operation was held.
Conclusion
There will be a day, maybe this year, when Treasury auctions don’t get enough bids. We know demand has been slipping, which is being inflated by the Fed. There are limits to how long the Fed can pump the market. When that day comes, this strategy on TBT/TLT will pay out in a massive and immediate way.
