3-Month Bills Turmoil Ahead Of March Debt Ceiling Showdown: Bid To Cover Plunges To 8 Year Lows

Despite the GOP"s tax reform victory, over the past few weeks, Congress once again punted on a formal decision how to keep government funded and what to do with America"s debt ceiling and as a result US legislators simply kicked the can on the agreement of raising the nation’s borrowing limit for another few months. However, with the Treasury expected to breach the ceiling as soon as late March, today"s $45 billion 3-Month Bill auction was closely watched as it serves as a fresh gauge of investor anxiety about the ongoing impasse.

As a reminder, in the first week of December, the Treasury deployed a series of extraordinary measures to stay under the debt ceiling cap since it was reinstated on December 8. But T-bill investors, in both the primary and secondary market,  remain especially wary given questions over what’s known as the debt ceiling’s drop-dead date. Today"s Bills mature March 29, within the Congressional Budget Office’s late-March to early-April window for when Treasury will exhaust the extra capacity it’s using to keep below the $20.5 trillion limit.

Quoted by Bloomberg, Justin Mandeville of Inveso said that the late-December bill auctions “speak volumes to investors being cautious as to when the potential drop-dead date will be,” adding that “we saw it back in July when we had concerns about the October bills.”

And sure enough, having just concluded, the 3M bill was especially ugly, pricing at 1.445%, or a 3bps tail to the 1.415% When Issued, with Indirect Buyers fleeing, and taking down just 20.1% of the finally allotment, down from 30.8% in the last 6 auctions, while Primary Dealers had no choice but to step up aggressively from 61.9% in the 6MMA, to 74% as Direct interest also fizzled from 7.3% in the last 6 auctions to just 5.9%. But nowhere was the revulsion quite so visible as in the bid to cover, which plunged from 3.04 in the past 6 auctions to just 2.71 on Dec. 26: this was the lowest Bid to Cover since January 2009.

As Bloomberg reminds us, at the government’s July 24 auction, the US Treasury sold $39 billion of three-month bills at 1.18 percent, then the highest rate since 2008. The bid to cover for that particular sale also matched the lowest for the maturity since 2009. Congress wound up passing a three-month debt-ceiling suspension Sept. 8, weeks before Treasury Secretary Steven Mnuchin estimated the government would run out of cash.

However, revulsion to paper that could be impacted by the debt ceiling was not just in the primary market: it also hit the secondary Bill market, as the previously noted kink that has emerged in the bill curve between securities maturing in late March and those in early April, has gotten even more pronounced. For several days after the Dec. 18 auction of bills maturing March 22, the rate on these securities was higher than debt maturing a week later. Since then, the rate on securities expiring March 29 has climbed to 1.44%, exceeding those on bills due the following week by nearly 10 bps as shown in the chart below.

And so, looking at the debt ceiling fight that refuses to go away despite the can being kicked every few months, while there is still a chance the issue could be resolved without going down to the wire, it is unlikely: while lawmakers hammered out a spending bill this week to keep the government open through Jan. 19, they didn’t include a provision to lift or suspend the debt ceiling. The longer a resolution remains at the bottom of Congress’s to-do list, the larger the T-bill dislocations could grow. Sooner or later, the bond market - which has been crying wolf on a technical US default - will eventually be right.

Curve Flattens After Blistering 30Y Auction Stops Through, Highest Bid To Cover In Two Years

After yesterday"s stellar 10Y auction, today at 1pm the Treasury sold the last of three weekly auctions, by offering $12 billion in 30Y paper to eager buyers. And eager they were, with the high yield of 2.870% stopping through the When Issued 2.874% by 0.4 bps. This was the biggest strop through on a 30Y auction going back to October 2016.

It wasn"t just the stop out that was strong, but the Bid to Cover as well, which at 2.530 was the highest going all the way back to September 2015. The internals were similary impressive, with Indirects taking down 62.8%, up from 58.8% in September, and on top of the 6 month average of 62.4%. Directs ended up with 10.6%, the highest award since March, higher than the 6.1% average, while Dealers were left holding 26.6% of the auction, the lowest dealer takedown since March, suggesting once again that even a modest increase in yields and foreign duration seekers crawl out of the woorwork and buy any US paper they can find.

Overall, while not a strong as yesterday"s 10Y auction, there were blistering demand for today"s last weekly auction, which was observed earlier courtesy of the 5s30s which has been flattening all day, sending the yield curve to the flattest in years.

Soaring Foreign Demand For Strong, Stopping Through 10Y Auction

Just 90 minutes after today"s strong 3Y auction, moments ago the Treasury sold $20 billion in a 10Y reopening of Cusip 2R0, which saw nothing short of blistering demand at both the close and through the internals. The high yield of 2.346% stopped through the When Issued by 0.2bps, or 2.348%, the first non-tailing 10Y auction since March 2017. This was also the highest yield for 10Y paper since the May 2017 auction.

But while the break in tailing auctions was notable, the internals were even more impressive: the bid to cover of 2.54 soared from last auction"s 2.28, and was above the 2.39 six auction average. Direct Bidders were awarded 6% of the auction, same as September, and right on top of the 6M moving average, however it was the Indirects where the firework were, as foreign buyers took down a whopping 69.1%, which was not only 14% higher than September, but was the highest since January"s 70.5%, and just shy of all time highs. Dealers were left holding just 24.9% of the 10Y auction, the lowest since March.

Overall, a very solid effort, one which confirms that no matter what happens to the macro picture, foreigns will jump at the first opportunity to bid up US 10Y paper when it approaches the recent resistance of 2.40%.

Ugly, Tailing 10Y Auction: Lowest Indirects Since 2016

If yesterday"s 3Y auction was ugly, today"s $20 billion 9-year-11 month reopening was just as abysmal.

With a high yield of 2.18%, this was not only a whopping 1.1bp tail to the 2.169% When Issued, it was the 6th consecutive "tail" in a row, with just 2 10Y auction stopping through so far in 2017 (January and March). That said, the yield was also the lowest since November, which may explain some of the weak bidside interest.

The internals were ugly, with a Bid to Cover of 2.28, fractionally above August"s 2.23, but well below the 6 month average. Just like yesterday, foreign bidders balked, and the Indirect award was a paltry 55.3%, down from 57.9% last month, and below the 63.4% average. This was the lowest Indirect award since November 2016. With Directs once again in line, at 6.0%, just below the 6.8% last month, it was the Dealers who had to step up and they do, taking 38.7% of the final allottment, the highest since November, and well above the 29.3 6 month average.

Finally, what likely prevented today"s auction from printing notably better, is that the recent record specials in repo, which last week hit a sub-fails rate of -3.75%, was completely gone as of this morning, and the 10Y traded at 0.00% in repo at 8am on Tuesday. And with no shorts to squeeze, the result was as expected.

Lowest Dealer Award On Record In Blistering 5Y Auction

The poor 2Y Auction that concluded just 90 minuets ago is a distant memory, because while the market, and especially Indirect bidders, appeared to balk sale of $26 billion in 2 Year paper, there appeared to be no concerns involving the just concluded sale of $34 billion in 5Y new paper, buyside demand for which could be described as "blistering."

The high yield of 1.742% stopped through the 1.75% When Issued by 0.8bps, with an 18.98% allocation at the high yield. It was the lowest 5Y yield going back to October of last year.

The internals were even more impressive: while the Bid to Cover was unchanged from last month at 2.58, and above the 6 month average of 2.43, the Indirect takedown was just shy of a record at 69.1% (vs 64.7% for the past 6 auction average), and only the jump in the Direct Bid award from 6.2% in July to 13.5%, the highest since July 2014, prevented Indirects from getting an all time high allotment. At the same time, the Dealer award dropped from an already low 24.1% in July to just 17.5%, the lowest in 5Y auction history.

In summary: an odd day in which in the span of 90 minutes we saw one poor and one stellar auction, for reasons that are not exactly clear.

No Fireworks In Today's Bill Auction: Has The Debt Ceiling Crisis Passed?

Unlike last Monday"s 3M T-Bill auction, which as a reminder priced at the highest yield since the fall of October, but more importantly showed a dramatic "kink" in the 3M-6M bill yield due to growing concerns of a disorderly debt ceiling debate and potential government shutdown...

... moments ago the Treasury auctioned off $39BN in 3M and $33BN in 6M paper, which came off without a hitch - with the 3M stopping through the 1.08% When Issued, pricing at 1.07%, and more importantly, the 6M-3M bill spread has now normalized.

Also of note, last week"s plunging Bid to Cover for the 3M auction which showed widespread buyside concern when bidding for the paper, rebounded sharply and rose from last Monday"s 2.87 to 3.18, while the 6M BTC rebounded from 2.91 to 3.08.

Some more details from Stone McCarthy:

• The 3-month bill auction stopped at 1.070%, with an 84.46% allocation at the high yield. The 3-month auction bid/cover ratio was 3.18. The average 3-month bid/cover over the past three months was 3.14. The WI was last trading at 1.080% at 11:30 AM. Indirect bidders took down 43.20% of the 3-month bill auction and Direct bidders took down 11.94%.


• The 6-month bill auction stopped at 1.130%, with a 12.00% allocation at the high yield. The 6-month auction bid/cover ratio was 3.08. The average 6-month bid/cover over the past three months was 3.27. The WI was last trading at 1.120% at 11:30AM. Indirect bidders took down 47.96% of the 6-month bill auction and Direct bidders took down 3.44%.

So are debt ceiling concerns now in the rearview mirror? Perhaps not: one possible explanation is that with today"s quarter end, major financial institutions simply had no choice and had to park cash in any available security, even if it is the "dreaded" 3-Month T-Bill.

Another explanation is that the further we drift from the D-Day, the greater the hope that the fiscal situation will be normalized, leading to stable demand for Bills. On Friday, Treasury Secretary Steve Mnuchin informed Congress that action would be needed on the debt ceiling by September 29th.

"Based upon our available information, I believe that it is critical that Congress act to increase the nation"s borrowing authority by September 29, 2017. I urge Congress to act promptly on this important matter," Mnuchin wrote in a letter addressed to Speaker Paul Ryan.

This means that with one month before the US "D-Day" and the Bill maturity day, bond traders may simply be assuming that this will be enough time to get the US house back in order.

As we will show in a follow up post, this may prove to be an aggressive assumption. For now, however, stability has returned to the Bill market, and the Treasury market - if only for now - is giving the "all clear" on the upcoming debt ciling and government shutdown discussions.

Ahead Of The Fed: Strongest Demand For 2Y Paper Since 2015; Lowest Dealer Award On Record

With the FOMC members currently huddling deep inside the bowels of the Marriner Eccles building, perhaps scheming how to spook markets by announcing a surprise rate hike tomorrow, one would have assumed demand for 2 Year paper in today"s auction would be less than stellar. One would be wrong, because moments ago the Treasury sold $26bn in 2 year paper to what was clearly an overabundance of demand: the high yield of 1.395% stopped through the When Issued 1.401% by 0.6 bps, and was the highest yield going back to October 2008.

The bid-to-cover rose to 3.06 from 3.03 in June, and was above the six previous auction average of 2.84. It was also the highest Bid to Cover since November 2015.

The internals were also rather impressive, with Indirects taking down 58.5%, above the 56.6% in June, and above the 6MMA of 54.1%. Directs were awarded 16.9%, down slightly from 18.4% last month and above the 6 month average of 13.7%. Combined these two meant record buyside interest, leaving Dealers with just 24.6% of the auction, down from 25.0% and below the 32.1% 6month average. This was the lowest Dealer award on record.

In other words, if anyone was worried about a surprise announcement by the Fed tomorrow, one which would send 2Y yields spiking, it wasn"t to be found among the bidders for today"s auction.

Blistering Demand For Short End As 2Y Auction Stops Through; Bid To Cover Jumps

With the Fed continuing to hike rates, it should come as no surprise that today"s 2Y auction printed at a high yield of 1.348%, the highest stop out since October 2008. And perhaps because the yield was so high, it invited significant buyside demand, mostly from foreign central banks, with the auction stopping through the When Issued of 1.354% by 0.6 bps, the same as last month, and demonstrating surprising demand for the short end of the curve.

Confirming the strong demand was the jump in the Bid to Cover from 2.904 in May to 3.031%, the highest since November 2015, as a result of $82.0bn in total bids for $29.2bn in notes sold vs six previous auction average of $74.2b in bids for $29.1b in notes sold.

Additionally the internals were just as strong, with the Indirect Bid of 56.62% well above the 6 month average of 50.2% if slightly less than last month"s 57.15%. However, with the surge in Direct Bids to 18.35%, it meant the Primary Dealer takedown of 25.04% was the second lowest on record.

Overall, this was a very strong auction, one which continued to foil the traditional narrative that in a time of rising rates demand for the short end should see some weakness, although one possible explanation comes from Bloomberg which notes that the auction was expected to benefit from short-covering demand and carry.

Treasury Concludes Weekly Treasury Sales With Strong, Stopping-Through 30Y Auction

Following a spectacular 3Y auction, and a strongish sale of 10Y paper on Monday, today the Treasury promptly concluded its weekly sale of Treasurys today ahead of the Fed"s 2-day meeting tomorrow, when it sold $12 billion in 30Y paper in a solid auction, with a high yield of 2.87%, stopping through the When Issued of 2.873, by 0.3bps, the first non-tailing 30Y auction since February. The stop out on today"s auction was the lowest since October"s 2.47%, which is somewhat surprising coming ahead of tomorrow"s 25 bps rate hike, which traders seem to expect will push yields lower not higher in a further flattening of the yield curve.

The internals were solid, with the bid to cover rising from 2.191 in May to 2.32 in June. Total bids amounted to $27.8bn for $12.0bn in bonds sold vs $37.8b in bids for $20.0bn in bonds sold at the previous auction.

Indirect bidders were awarded 63.7% vs previous auction’s 59.1%, and just above the 6 month average of 63.6%. Direct ended up with with 6.7% of the allotment vs 5.3% in the previous auction, while Dealers were left holding 29.6% vs last auction’s 35.6%: numbers which largely were in line with recent expectations.

Following the week"s auctions, one can conclude that few buyers, among them primarily foreign central banks, are too worried about a sharp blow out in yields as a result of Yellen"s announcement tomorrow, suggesting that just like stocks, bonds also expect a "dovish hike."

10 Year Auction Tails Despite Strongest Foreign Central Bank Demand Since January

Following the earlier blockbuster 3Y auction, which stopped through and printed unexpectedly strong metrics in every possible category, moments ago the US followed up with today"s second auction, a 9-year-11-month reopening of CUSIP X88, in which $20 billion in paper was sold, once again largely to willing foreign bidders, which however unlike today"s earlier auction priced at a high yield of 2.195%, tailing modestly the When Issued of 2.188% by 0.7 bps. This was the lowest 10Y auction stop since February, and was over 20bps below the 2.40% in May.

The tail may have been the result of the move in the curve following the earlier auction as demand for various maturities sought to find equilibrium prices along the spline. Incidentally, this was also the 3rd consecutive tailing 10Y auction in a row, and 6th of the last 8.

Despite the tail, the internals were strong, with the Bid to Cover coming in at 2.54, the highest since March, and above both May"s 2.33 and the 6 month average of 2.45. Indirect demand rebounded, with foreign central banks taking down 66.1% of the auction, above 60.7% in May, and the highest since January. Directs were awarded 5.3%, in line with recent auctions, if below the 6 month average due to the March 15.7% outlier print. Dealers were left with 29.6%, below the 34.2% in March and almost on top of the 6 month average of 28.3%. 

Overall, a strongish auction, if not quite the blockbuster that priced 90 minutes earlier.

Mediocre, Tailing 5Y Auction Prints At 7 Month Low Yield

If yesterday"s 5Y auction saw blistering buyside demand, and was the first 5Y auction to avoid tailing in 2017, today"s 7Y left much to be desired.

Printing with a high yield of 2.06%, the auction tailed modestly to the 2.058% When Issued, the first tail since September. This was the lowest yield on the 7Y tenor since October"s 1.653%, and below the 6 auction average of 2.222%. 

The Bid to Cover of 2.54 disappointed, printing below last month"s 2.733, and also below the 6-auction average of 2.58.

Finally, the internals were also mixed, with Indirects taking down 61.2%, a steep drop from last month"s record 81.7%, although the decline was offset by jump in Directs, which rose from 9.5% to 17.2%, 70% above the 6 month average of 10.7%, and leaving 21.6% to Dealers, just above the 18.3% 6MMA.

Overall, a mediocre auction and certainly a disappointment from yesterday"s stellar 5 Year auction, although hardly a disaster, and as a result the curve is little changed after the auction.

Blistering Demand For 5Y Trasury Auction; First "Stop Through" In 2017

After 4 consecutive 5Y auctions that resulted in a "tail", moments ago the Treasury sold $34 billion in 5Y paper which finally "stopped through" the When Issued for the first time since December, printing at a High Yield of 1.831%, 0.7bps through the 1.838% When Issued.

Another confirmation that like yesterday"s 2Y auction today"s 5Y issuance was stronger than expected, was the jump in the Bid to Cover which rose to 2.67, the highest since December, and well above the 2.42 6 month average, as total bids of $95.0 billion were received for $38.1BN in notes.  Additionally, the internals were strong too, with Indirecst rebounding from last month"s 57.3% low to 68.7%, above the 6 month average of 63.1%, while Directs were awarded 8.6% of the auction, above the 5.3% in April and 6MMA. Dealers were left just 22.7% of the auction, the lowest going back to August 2016.

Overall, a very strong auction, and certainly better than what the market had expected.

Stronger Than Expected 2 Year Auction, Thanks To Highest Yield Since October 2008

After today"s very ugly 4-Week Bill auction, moments ago the bond market redeemed itself somewhat when it sold $29.1BN (including $3.1BN in SOMA) in 2 Year paper. The high yield of 1.316% stopped through the 1.322% When Issued by 0.6 bps, which was the biggest "stop through" since last August. Perhaps the yield was a factor: at just below 1.32%, this was the highest auction stop on 2Y paper since October 2008.

The internals also came in strong, with the Bid to Cover rising from 2.853 to 2.904, the highest since May 2016, with total bids of $78.6BN for $29.1BN in notes sold.

Indirects took down 57.15%, below the 58.9% in April, but above the 46.6% average of the last six auction. Directs took down 12.4%, in line with recent history, leaving 30.45% to Dealers, below the 41% 6MMA.

In summary, a strong auction which the bond market was desperately in need of following some very disappointing Bill and Coupon auctions over the past few weeks.

Treasury Sells $24 BIllion in 3 Year Paper In Mediocre, Tailing Auction

Moments ago the Treasury sold $24 billion in 3 Year paper in an auction that was uneventful, if somewhat on the weaker side.

The high yield of 1.572% tailed the When Issued by 1 basis point, and was higher than both last month"s 1.517% and the last six auction average of 1.423%.

The bid to cover rose modestly from last month"s 2.62 to 2.72 if still below the 6 month average of 2.74. Total bids of $74.2b for $31.9b in notes sold vs six previous auction average of $67.4b in bids for average of $25.6b in notes sold

The internals were in line with recent performance, with Indirects taking down 50.8%, slighly above the 48.7% 6 month average, Directs taking 9.3% of the auction, the highest since October, and above the 6MMA of 8.0%, leaving Dealers with 39.9%.

Overall, a mediocre auction, with a slighly higher bid to cover, offset by a modest tail, and will be quickly forgotten ahead of tomorrow"s more important 10Y auction.

Mediocre, Tailing 30Y Auction Concludes This Week's Treasury Issuance

With the 30Y trading comfortably in repo today, with no tightness as indicated by the +0.7% repo rate, it seemed possible that the auction would join this week"s previous 2 auctions of 3 and 10 Year paper by printing with a modest tail. So when the Treasury announced results from today"s 29-Year 10-Month reopening, few were surprised that the High Yield of 2.938% tailed the When Issued of 2.929% by 0.9bps, suggesting yet another mediocre auction. 27.01% of the bids at the high yield were accepted.

The internals confirmed the poor result: the bid/cover was 2.23, down from 2.34 at last month"s auction and below the 2.31% 6 month average. This was the lowest bid to cover since November 2016.

Indirect bidders took down 64.5% of the auction, just above the 62.9% average, while Direct bidders took down 5.8% of the auction, a sharp drop from last month"s 13.1%, and below the 6 month average of 8.4%. Dealers were left with 29.7% of the allotment.

The conclusion of this week"s TSY issuance left quite a bit to be desired in terms of primary demand, and since the recurring tails suggest that many of the TSY shorts have been mostly closed out, it implies a growing possibility that a new layer of shorts will be put across the curve in the near future.

Strong 7Y Auction Rounds Off Weekly Treasury Issuance

Following two medicore auction earlier in the week, moments ago the Treasury concluded the week"s issuance of paper with a strong sale of $28 billion in 7 Year Notes, which priced at a yield of 2.215%, (with a 19.2% allocation at the high yield), stopping through the When Issued of 2.219% by 0.4% bps, likely aided by this morning"s ECB news as well as a reduction in corporate issuance leading to less rate locks, which in turn offset the lack of a short interest heading into today"s auction where the repo rate on 7Y paper was a comfortable +0.30%.

The Bid to cover of 2.564 was an improvement from last month"s 2.491, and the highest of 2017, in fact it was the highest since November 2016; it was also higher than the last 6 auction average of 2.52.

Indirect Bidders, i.e., foreign buyers, once again stepped up their interest, taking down 71.1%, above the 63.8% from February, and well above the 65.7% 6 month prior average. Direct bidders declined modestly from 11.4% (and an average of 11.7%) to 8.4%, leaving 20.5% to Primary Dealers, below their average of 22.7% in the prior 6 auctions.

As discussed before, if potential bond buyers are concerned about a rapid rate rise in coming years, they are not indicating as much with declined interest at TSY auctions.