Market 02/26: Bond demand unexpectedly drops in the massive $130 billion auction session

Auction of nearly USD 130 billion in 2Y and 5Y Treasury bonds

5Y bond auction: market demand decreases

The nearly USD 67 billion 5Y Treasury bond auction session has a record high Allotted at High (amount of investors awarded at High Yield):

• High Yield: 4.320%=, higher than market yield 4.312% and previous session: 4.055%

  • => Tails: 0.8 bps

• Of which, up to 89.61% bidders awarded placed at this High Yield (January only had 49.75% Allotted at High)

  • => Market demand for 5Y Treasury bonds decreases 

• Bid-to-Cover: 2.35

2Y bond auction with the largest value in 30 years

Today's 2Y Treasury bond auction session has a value up to $63 billion - largest since 1990

The auction session only had small tails, not too severe. Demand from foreign institutions remains high:

• High yield: 4.691%, slightly higher than market yield 4.689% => tails 0.2bps

  • Much higher than previous auction 4.365%. But this is not considered a major failure for 2Y bonds as current yields are higher than January yields.

• Bid-to-cover ratio: 2.49 (previous session: 2.57)

• Auction award composition:

  • Primary Dealers only account for 14.73%

  • Indirect buyers account for 65.16%

Market news: Nancy Pelosi buys USD 1.25 million Call Option of Palo Alto

• Nancy Pelosi just bought 1.25 million Call Option with Strike 200 USD, expiring on 01/17/2025.

Pelosi's buy order was placed right on 02/21, just in time to catch the bottom when PANW dropped >-30% after earnings report:

…after Pelosi's trade disclosure today, $PANW is up 10% in the morning session:

FYI: Controversy of House Speaker Pelosi over conflict of interest in trading vs legislative role:

Pelosi and husband once earned ~$2 million in 93 days (~10 times her House salary) from buying Nvidia Calls:

• Pelosi has a history of unusual trades causing controversy over legality if US Congress members trade in the market.

  • Despite public outrage, she nonchalantly replied: America is a free market economy. Congress can participate in trading.

    (“We are a free market economy. Congress should be able to participate in that"Specific:

Pelosi traded millions USD in Nvidia stock before the Biden administration voted on the US chip bill.

• This information leak later forced Pelosi to divest NVDA.

  • This information was later leaked, forcing Pelosi to divest from NVDA.

• Then, she proposed a bill to ban Congress from trading, but the bill was full of loopholes, and she still traded herself.

• In November last year, she bought a large amount of NVDA Calls, her position increased to nearly 2 million USD in just 92 days (10x her annual salary at the House).

  

Dismal home sales, home prices at the lowest in 2 years

January 2024 home sales: +1.5% m/m, (lower than expected +3.0% m/m and December: +7.2% M/M)

• Total sales: 661,000 (lower than 684,000 expected)

Y/Y growth rate down to +1.8%, lowest in the past 10 months

Median home price (50% of contracts) down to 420,700 USD: -2.6% Y/Y but average price up to 534,300 USD

→ Many high-priced homes are being sold

Mortgage rates rise again, homebuilders worry about not being able to sell homes:

Earnings update: Berkshire Hathaway, Domino Pizza

1. Berkshire Hathaway: FY23

• Net profit 97 billion USD.

• Share buybacks: 9 billion USD.

• Service and retail segment margin: 12% (+0.5pp Y/Y).

• Investment income (unrealized): 75 billion USD.

• Cash and short-term securities: 168 billion USD

2. Domino Pizza:

• Revenue: 1.403 billion USD, +0.8% Y/Y (due to higher franchise fees and supply chain revenue)

  • Retail sales +4.9% Y/Y

• Operating profit: +3.4% Y/Y to 257.2 million USD

• EPS: 4.48 USD , +1.1% Y/Y

• Dividend up 25% to 1.51 USD/share

• Global store count: Q4 +394 stores, total 20,591 shops

Key economic events this week (02/26-03/01)

1. New home sales data - Monday

2. Conference Board Consumer Confidence Index - Tuesday

3. US Q4 GDP - Wednesday

4. January PCE inflation data - Thursday

5. 12 Fed officials will speak this week

~10% of S&P 500 companies will report earnings this week

Some other news

1. Hedge funds are dumping tech stocks at the fastest pace in 7 months, ending 6 consecutive weeks of inflows into tech stocks.

   • Short positions surge, 3.5x long positions.

2. Microsoft partners with Mistral - French AI startup, to expand its competitiveness in this field, in addition to previous partnership with OpenAI