MBS LUNCH: Average 2 Year Note Auction. Not Much Reaction

By: • Tue, Jan 26 2010, 1:32 PM

The Treasury has successfully auctioned $44 billion 2 year notes. This was the fourth consecutive 2 year issue at that size.

Here are the results.

PRICE/ACCEPTANCES
    Price                        99.990112
    Accepted at high   88.79 pct
    Bid-to-cover ratio 3.13

AMOUNTS TENDERED AND ACCEPTED (dollars)
    Total accepted                        44,000,054,800
    Total public bids tendered       137,544,599,800
    Competitive bids accepted        43,494,455,000
    Noncompetitive bids accepted      455,599,800
    Fed add-ons                                716,982,800

    Primary Dealer Tendered          94,501,000,000
    Primary Dealer Accepted           20,057,085,000
    Primary Dealer Hit Rate            21.2% of what they bid on
    Primary Dealer Total Award       45.6% of total auction

    Direct Bidder Tendered             10,496,000,000
    Direct Bidder Accepted                4,685,395,000
    Direct Bidder Hit Rate                44.6% of what they bid on
    Direct Bidder Total Award           10.6% of total auction

    Indirect Bidder Tendered           32,042,000,000
    Indirect Bidder Accepted            18,751,975,000
    Indirect Bidder Hit Rate             58.5% of what they bid on
    Indirect Bidder Total Award        42.6% of total auction

The bid to cover ratio was below recent averages. Primary Dealers were awarded more than usual, Direct Bidders were awarded less, and Indirect Bidders were awarded more than recent averages.

Following the average auction (average at best), interest rates moved higher. However shortly thereafter status quo was restored as short covering slowed the sell off which then triggered bargain buying near the session lows (day trading). Now we're pretty much right where we left off ahead of the auction.

The 3.375% coupon bearing 10 year Treasury note is sittin sideways +0-03 at 98-00 yielding 3.617%.

The FN 4.0 is +0-03 at 97-27 yielding 4.206% and the FN 4.5 is +0-03 at 100-29 yielding 4.413%. The secondary market current coupon is 4.382%. The CC is +76/10yr TSY and +65/10yr swap.

This was an average auction, nothing special...I am still defensive of recent rebate improvements, especially with $74 billion in 5s and 7s to go off tomorrow and Thursday. From a lock or float perspective I just dont see the incentive to keep on floating. Barring some form of tapebomb, rates are overbought and due a move higher. Mortgage rates and rebate are very aggressive at the moment, at least lock up a portion of your pipeline. (Not that everyone is working with a huge float right now...loan production supply continues to be below average)