There’s a seemingly boring catalyst on Thursday, October 8, that could ignite an asset we’ve been watching for weeks.
The strongest trade setups can come from “boring” catalysts, because by the time the rest of the market notices the shift, we’re already along for the ride.
It’s the biggest catalyst this week.
Most people don’t understand the relationship between government debt, bond yields, interest rates, asset prices, etc…
But I do.
I worked on Wall Street for about two decades. In that environment, whenever the government stuck its hand in the cookie jar, it was a big event.
Especially when the financial state of the market was already under pressure…
We’re primed for a volatile reaction due to Thursday’s catalyst.
Treasury Auction
Every few weeks, the U.S. government goes asking for money.
It does so by selling bonds at a Treasury auction. Investors, banks, and foreign governments bid on the debt, and the results set the interest rate the government pays to borrow.
If lots of buyers show up, the government gets a good deal and doesn’t have to pay as high a rate.
If demand is light, it has to offer a higher rate to get the deal done.
On Thursday, October 8, the Treasury will auction 30-year bonds. Results hit at 1 p.m. ET.
Normally, this is background noise. But not right now…
The 10-year yield rose more than 50 basis points in September, its worst month in four years. And the 30-year yield closed last week at 5.63%, its highest level since 2002.
It’s becoming more expensive for the U.S. government to sell bonds.
Here’s how we can get in on the action…
Bond prices and yields move in opposite directions. Weak demand means yields jump and bond prices fall. Strong demand means yields drop and bond prices rally.
And the 30-year is the most rate-sensitive bond that the government sells.
My #1 Watch
We’ve spoken about iShares 20+ Year Treasury Bond ETF (NASDAQ: TLT) several times in the last few weeks.
As confidence in the U.S. wanes, bond prices fall. Investors need a higher yield to justify buying U.S. debt. And the lack of demand is causing a bond selloff.
In the last few days, the selloff grew especially steep.
High demand on Thursday could cause a sizable TLT rally from these levels. But sluggish demand could push it even lower.
I like to trade reversion setups after an outsized move, like the recent bounce in TLT on October 1.
The price could rally again after Thursday’s auction. And now we have support from the October 1 rally…
Get ready for Thursday’s auction. This catalyst is flying under the radar, and the reaction in the market could be massive.
Stay Street Smart,
Jeff Zananiri
The process behind it: Today @ 10 A.M. ET.
