Stellar 3Y Auction: Highest Bid To Cover Since Sept 2015, Foreign Demand Surges

Unlike last month"s ugly 3Y auction, today"s just concluded sale of $24 billion in 3 year paper was stellar, stopping through the When Issued 1.934% by 0.2bps, a surge in buyside demand as the Bid to Cover jumped from 2.76 to 3.15, the highest since September 2015, while Indirect Bidders took down the most since August.

The details: the high yield was 1.932% vs six previous auction average 1.572%, it stopped through the WI of 1.394%.

The Bid-to- cover was 3.15, up from 2.76 in October, and well above the previous six auction average of 2.88.

Dealers were awarded 33.6%, slightly below the six previous auction average 35.2%, and down from 37.5% last month, while Direct bidders took down 7.4%, below last month"s 9.0%, and down from the six previous auction average 8.8%.  Finally, foreign central banks and reserve managers, i.e., Indirect bidders were awarded 59.0% vs the 6auction average 56.0%, and up from 53.5% last month. It was also the highest Inidrect award since August 2017.

Overall, a very solid auction and one which sets the stage for today"s second, benchmark bond auction of 10Y paper set for 1pm.

Tailing 2Y Auction Prices At Highest Yield Since September 2008 As Foreign Buyers Stay Away

With 2Y yields having jumped sharply in recent week, it was not surprising that today"s auction of $26 billion in 2Y paper would have a high yield, and sure enough, printing at a high yield 1.765%, the highest since September 2007, tailing the When Issued 1.763% by 0.2bps, and well above the six previous auction average of 1.410%. This was the third consecutive tailing 2Y auction.

The internals were hardly impressive, with the bid-to- cover of 2.725, lower than both last month"s 2.74 and also below the six previous auction average 2.91.  In fact, it was the lowest since January"s 2.682%, with total bids of $72.3bn for $27.4bn in notes sold vs six previous auction average of $78.0b in bids for $28.3b in notes sold.

Also not surprising perhaps is that foreign buyers were less than enthusiastic, with Indirect bidders awarded only 41.9% of the auction, down sharply from last month"s 48.2%, and below the 6 month moving average of 51.7%. It was also the lowest since December 2016. Dealers were awarded almost the same, or 41.2%, far higher than the six previous auction average 32.7%. Finally, direct bidders received 17% of the auction, roughly in line with the 17% average of the prior 6 auctions.

Overall, the auction confirms that investor interest for the short-end of the curve is waning, and suggests that more rate hikes by the Fed are coming, which in turn will push the 2Y yield even higher, further steepening the yield curve in the coming days.

Mediocre, Tailing 2Y Auction Stops At Highest Yield Since October 2008

With everyone and their grandmother short the short-end of the curve, if not enough to push repo rates into negative territory and just begging for a short squeeze, moments ago the Treasury sold $26 billion in 2Y paper in a largely average if somewhat disappointing auction, which will only embolden the bears to press the short end more.

The auction stopped at 1.596%, tailing the When Issued of 1.591% by 0.5bps; this was the highest yield for a 2Y auction since October 2008. The auction bid/cover ratio was 2.74, down from last month"s 2.88. The average bid/cover was 2.79 over the prior year, but a stronger 2.93 over the prior six months. Non-comps were $129.5 million this month, up from $118.8 million last month, and there were $100 million in FIMA non-comps.

The Internals were a modest improvement to last month, with Indirects taking down 48.2%, up from 44.2% in September, but well below the 53.5% six auction average; Direct bidders were awarded 14.15% vs the 6 month average of 15.1% and below last month"s 19.0% while Dealers were awarded 37.7%, up from 36.8% last month and well above the six prior average of 31.4%.

Overall, a mediocre auction which could have been even worse in light of today"s ongoing risk on euphoria, and in light of a virtual certainty that the Fed will hike not only in December but continue tightening over the next year. The only question is whether the disappointing auction will prompt a parallel widening in the curve or if, as has been the case in recent months, the curve flattens even more.

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%.

Debt Ceiling Turmoil: 4Wk Bills Price At Highest Yield Since Sept 2008 On Technical Default Fears

While traditionally few care about T-Bill auction results, which are usually a rather subdued affair, today was different: with today"s $20 billion in 4-Week Bills maturing on October 5, or smack in the middle of the interval when the US is expected to run out of cash absent a debt ceiling deal, there was palpable turmoil in the Bills market, as the yield on the just concluded auction demonstrated.

With the When Issued trading at 1.23%, the just priced auction printed at a high yield of 1.30%, what appears to be a record tail of7 bps, and the highest yield since September 2008. It is also an indication that for all the talk of a reduction in government shutdown/debt ceiling crisis odds, the market will have none of it, as the ongoing "king" in the October bills demonstrates.

The internals were mostly remarkable for the soaring yields, with other components coming roughly in line.:

• High yield 1.300% vs prior six auction average 0.966%


• Bid-to- cover 3.04 vs prior six auction average 3.07


• Dealers awarded 58.5% vs previous six auction average 64.7%


• Direct bidders awarded 16.9% vs prior six auction average 8.6%


• Indirect bidders awarded 24.6% vs prior six auction average 26.6%

Putting the latest T-Bill "Kink" in perspective, the chart below shows just how high the Sept-Oct "hump" has blown out to following the auction.

Primary Dealer Bid Surges In Poor 2Y Auction

While the high yield of the just priced 2Y auction came "on the screws" at 1.345%, below last month"s 1.401%, but above the six previous auction average of 1.305%. and exactly where the When Issued suggested today"s auction of $26 billion in 2Y notes would price, the internals were decidedly weaker than the stop out would suggest.

The bid-to- cover of 2.86 was a notable decline from last month"s 3.06%, as well as below the 6 month average of 2.90%. It was also the lowest since April.

However, the most surprising aspect of today"s auction was the surprising surge in Dealers take down which surged to 41.6%, up from 24.6% in July, the highest since January, and well above the six auction average of 29.3%. And since the direct bidder award of 12.6% was below both July"s 16.9% award and the six previous auction average 15.0%, it meant foreign buyers, aka Indirect bidders, were awarded only 45.8%, a sharp drop from last month"s 58.5%, and below the six previous auction average 55.7%.

Quoted by Bloomberg, FTN strategist Jim Vogel said that metrics fell short of historical benchmarks due to the “odd timing of the sale and general lack of change in short UST since the end of July.”  Bloomberg also notes that the auction was expected to struggle because of U.K. holiday, summer vacations and its position 90 minutes before 5Y issue.

Overall, a rather weak auction which was saved by the jump in Dealer awards, perhaps reflecting growing debt ceiling fears ahead of the X-Date some time in late September, early October.

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.

"Stellar" 3 Year Auction: Highest Bid To Cover Since 2015

Launching this week"s Treasury issuance of 3, 10 and 30Y paper, this afternoon"s 3-year note auction results was "stellar", as Stone McCarthy put it.

The auction stopped 0.9 bps through the 1.529% When Issued, printing at 1.520% - the third consecutive "stopping through" auction in a row - with the highest bid/cover in more than a year and a half, as 3.13 bids tendered for every dollar, the highest since December 2015, far above the 2.80 6 month average. There were $75.1BN bids for $24BN in notes sold (ex-SOMA).

The internals were also impressive, with foreign buyers, or Indirects, awarded 64.1%, above last month"s 52.6% and above the 6MMA of 54.6%. The $20.960 billion Indirect bid today was far above the $15.229 billion average of the prior six months. In fact, outside of the $22.296 billion bid in June, it was the largest since January 2012. The hit ration was good for a bid of that size, boosting the Indirect takedown to 64.5% which is well above the 54.6% average of the prior six months. That is the third largest Indirect takedown on record, behind only the 65.6% takedown two months ago and the record 68.5% takedown in November 2009.

Directs took down 10.2%, also above the 6 month average of 8.37. The $3.969 billion size of the bid compares to an average of $3.681 billion over the prior six months, and the 61.1% hit ratio was strong. The combination pushed the Direct bidder takedown to 10.2% of the auction today, which is the largest since July 2016. Direct bidders had takedown down an average of 8.4% of the auctions over the past six months.

The 74.2% combined buyside takedown was the second largest on record, behind only the 76.1% takedown at the November 2009 auction.

Even the Dealer bid - which was left with 25.8% of the final allotment, the second lowest in history - was much improved this month. The $50.058 billion size of the bid compares to an average of $48.055 billion over the past six months. The strength of the buyside bid meant that dealers largely missed on those bids though, leaving them with only 25.8% of the auction today. As the mirror of the buyside, that is the third smallest Dealer takedown on record. 

Overall, another strong auction on the short-end of the curve, suggesting that there may have been an outsized element of short covering following today"s much more hawkish then expected JOLTS report which sent the USD surging, and prompted speculation about a faster than expected tightening by the Fed.

Mediocre, Tailing 7 Year Auction Following Yesterday's Short Squeeze

After two surprisingly strong auctions earlier in the week, when the Treasury sold both 2 and 5 Year paper to unexpectedly brisk demand ahead of the FOMC meeting, which bounced despite a record high short interest in 2Y futs, moments ago the last auction of the week closed when $28 billion in 7 Year paper was sold at a high yield of 2.126%, tailing the When Issued 2.122%, and the highest yield since 2.215% in March.

The internals were mediocre, with the bid-to-cover of 2.54 better than last month"s 2.461%, if right on top of the six auction average of 2.54%.  Indirect bidders took down 67.7%, also better than last month"s 67.4%  and above the 6MMA of 69.3%, as direct bidders were awarded 11.6%, more than the 9.4% taken down in June and the 6 auction average of 10.4%. Finally, Dealers were left with 20.6%, the lowest since April"s record low 8.8% and below the 6MMA 20.2%.

While the auction was not nearly as exciting as the last two, perhaps much of that has to do with the post-Fed rally observed yesterday, which forced short covering, mostly on the short end, but also broadly across the curve. And with less shorts to squeeze, the result was a rather mediocre auction.

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 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.

Treasury Sells $34 Billion In 5Y Paper In Ugly, Tailing Auction At Lowest Yield Since November

After yesterday"s stellar 2Y auction, moments ago the Treasury sold $34 billion in 5 Year paper in what can only be described as a quite ugly auction.

The high yield printed at 1.875%, which maybe because it was the lowest stop since November"s 1.76%, drew far less bidside interest than yesterday"s auction. It also tailed by 0.7bps to the 1.875 When Issued.

The internals were just as ugly, with the Bid To Cover slumping to 2.34 from last month"s 2.37 and the 6 month average of 2.45.

Indirects took down 57.3%, well below the 6 month average of 63.5%, and the lowest since July 2016. With Directs expressing little interest too, it meant Dealers were stuck taking down 37.4% of the final allotment, the highest since last July.

It is unclear what changed so notably in the past 24 hours, but whatever it was it appears to have spooked bidders and certainly foreign buyers.

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.

Mediocre Demand For Today's Tailing 10Y Auction

One day after an otherwise strong 3Y auction saw the biggest tail in months, moments ago the Treasury sold $20 billion in benchmark, 10Y paper which like in yesterday"s case, saw no shortage of collateral ahead of pricing, trading +0.50% in repo. And since there was no physical squeeze going into the auction, it was hardly a surprise that today"s 10Y auction likewise tailed by 1bps, printing at 2.332%, wider than the 2.322% When Issued, and while it was well below last month"s 2.56%, it was above the 6 month average of 2.26%.

The internals were likewise disappointing, with the bid-to-cover dropping to 2.48 vs last auction 2.66, and in line with the 6 month average of 2.44

Indirect bidders awarded 65.2% vs last auction 65.8%, and above the 6MMA of 62.3%, as direct bidders saw a sharp drop in take down, sliding to 5.3% vs last auction 15.7%. Finally, dealers were awarded 29.5% vs last auction"s 18.6%.

Overall a mediocre, tailing auction, which prompted the Treasury complex to pare its intraday gains, and even briefly push the Dow Jones in the green.

Solid 2-Year Auction: Highest Indirects Since February 2016

After last month"s stellar 2 Year auction, today"s issuance of $26 billion in 2 year paper was a bit of a let down, printing at a yield of 1.261%, or a 0.1 bp tail to the 1.260% When Issued. The lack of a squeeze into the auction is perhaps the result of the lack of any 2Y specials in repo, where the OTR was trading comfortably, or 0.50% in the positive range.  The yield was higher than last month"s 1.23%, if below the 1.28% from December.

The bid-to-cover of 2.73 was below last month"s 2.819, however above the last six auction average of 2.64. Total bids of $74.0b for $29.1b in notes sold vs six previous auction average of $71.1b in bids for $28.4b in notes sold.

However, the internals were modestly better, with dealers awarded 35.7% vs six previous auction average 46.9%. This was the result of a modest drop in direct bidders who were awarded 10.8%, compared to 20% last month, if again higher than the previous six auction average 13.5%. The silver lining was the strong Indirect take down, which rose from 49.8% last month to 53.6%, well above the six previous auction average 39.6%, and the highest Indirect take down for this tenor going back to February 2016.

Overall a solid auction, whose internals were measurably better than the headline print.