MBS LUNCH: Auction Results

By: Matthew Graham •
  • High Yield of 1.034
  • 27.16% taken at high
  • WI yield was around .967
  • Bid To Cover 3.23
  • Indirect Bid of $19.18 bln out of $43 bln total auction

No initial reaction in MBS or tsy's.  Don't get too caught up with the 3+ BTC.  The shorter the maturity issuances have been high.  Big yawn so far...  No movement...  More to follow and will be appended to this post.

(updated 1:25 pm below)

The markets have still not shown much by way of response yet, though things are beginning to move in a favorable direction.  MBS are up a few ticks and tsy's are stabilizing now about 2 bps lower in yield.  I know many of you will raise the question, "why isn't the market response better?  Seems like great results..."

Bottom line is this: there's a general tendency for the average observer of tsy results to put an inordinate amount of importance on bid-to-cover.  Even I get the initial gut reaction "oh, good auction" when I see a 3.23 BTC.  It's important to remember that the only thing BTC means is that there were 3.23 times bids versus amount offered.  The high yield this time around was a few bps higher than WI yield (WI=when issued = the yield that's currently being traded), but then you'd also have to account for the fact that only about a quarter of bids were accepted at the high yield.  The median yield was very much in line with WI yields. 

Once we look at the yields in conjunction with a slightly lower than previous indirect bid, plus consider the tendency for short maturities to garner healthy BTC's of late (don't get me wrong, the 3.23 btc was the best since 2007), the underwhelming initial response begins to be more understandable.  The fact that additional auctions are yet to come this week also has a significant impact on the extent to which markets will allow the first auction of a limited data week amidst a period of immense historical indecision during the ostensible recovery of an unprecedented economic crisis to impact trading.  (Make grammatical sense of THAT one!)

Couple last things to remember...  Voliatility is common after auctions, but you should be fairly well prepared for that considering recent range trading.  Not only that, but it appears that the amount of volume and directionality that it being created is favoring lower yields.  Here are the charts and the auction official auction results...