Investors Bail in Midafternoon, Causing the Worst Selloff in Two Months

And next week could be gloomy as well.
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The Treasury market was asleep at the wheel when all hell broke loose.

Dealers sold $2 billion to $2.5 billion contracts into the Chicago bond futures pits this afternoon, largely clustered around 12:30 p.m. EDT. That triggered a flurry of selling just when the market was easing into the weekend and volume was tapering off. The result was the worst one-day selloff since Feb. 25.

The market, which after this morning's economic data was counting down to the 3 p.m. EDT futures close, was forced into a heavy round of technical-driven selling. The final tally was ugly: the 30-year bond is currently down 1 30/32 to trade at 94 3/32. The yield rose 14 basis points to close at 5.66%.

According to sources, one bond investor, said to be

Pimco

funds, sold approximately $800 million to $1 billion in bonds throughout the day. The initial selling took place in the active morning, when traders were reacting to this morning's first-quarter

gross domestic product

report and April's

Chicago purchasing managers' index

.

Another wave of selling hit midday. The dealers that took on the positions, with

Goldman Sachs

said to be the largest player, sold futures contracts into the market as a hedge. Pimco and Goldman did not comment on today's activity.

Sources said at least 20,000 to 25,000 long bond contracts, equivalent to $2 billion to $2.5 billion, were sold into the futures pits in the early afternoon, priced between 121 5/32 and 120 28/32. The hefty sales sent the June contract spiraling, and it swept up other traders in its midst. Selling bond contracts into the futures pits is an easy way to hedge against holding a large cash position.

"In an illiquid cash market you're not going to be able to hedge the inventory with cash instruments -- you have to do it with futures," said Tony Crescenzi, chief bond market strategist at

Miller Tabak Hirsch

. "If you go in the pit you can quickly get rid of bigger chunks, because it's a much more liquid market."

Technical traders identified 121 3/32 on the contract as a support level. For various reasons, day traders identified this as a spot where the bond contract looks attractive enough to buy. But once the contract has "broken" through that support, the buyers, who are now losing money, become sellers, only adding to the carnage.

"Since people look at the same trends, the market wasn't that liquid, and it couldn't handle the sales that were hit with it," said Walter Burke, technical analyst at

MCM Moneywatch

.

The June contract, traded on the

Chicago Board of Trade closed down 2 1/32 to 120 6/32. The five-year note and 10-year note weren't immune from the thrashing either. The yield on the five-year rose to 5.21% from 5.09%, while the 10-year climbed to 5.35% from 5.22%.

Gregory Carr, market strategist at

A.G. Edwards

, believes this selloff will be a buying opportunity once retail investors return to the market. "We think this blowout is going to retrace next week," said Carr. "It could spur some people to bring in money."

The danger for bullish types is that Monday's data, which includes the

National Association of Purchasing Managers index

, will be unfriendly to the market, just as today's data. Coupled with Wednesday's refunding announcement and Friday's

employment

report, it could depress the market further.

"The market has done some real technical damage here," said one trader at a primary dealer. "Going into the refunding, any uptick next week is going to meet with huge selling."