MBS LUNCH: 7-Year Auction Results and Market Reaction
The Treasury has successfully auctioned $32 billion 7-year notes. This was the third consecutive time the 7 year note offering has been at a record $32 billion size.
The high yield was 3.127%, which was 0.5 basis points lower than the 1pm "When Issued" yield, which is better than average.
The bid to cover ratio, a measure of auction demand, was 2.85 bids submitted for every one accepted by the Treasury. The 7 year note has seen an average bid to cover of 2.571 since the issue was reopened in February 2009, so auction demand was strong!
Dealers took 37.1% of the auction. This is below recent auction averages.
Direct Bidders took 11.8% of the issuance. This is well above recent auction averages.
Indirect Bidders were awarded 51.0% of the auction. Below recent 7 year note auction averages, but better than the most recent 7yr note auction turnout where indirects took 44.7% of the total.
Overall...a great auction.
Here are the results:
7-YEAR NOTES
YIELDS
High 3.127 pct
Median 3.090 pct
Low 2.970 pct
PRICE/ACCEPTANCES
Price 99.987385
Accepted at high 36.66 pct
Bid-to-cover ratio 2.85
AMOUNTS TENDERED AND ACCEPTED (dollars)
Total accepted 32,000,023,900
Total public bids tendered 91,340,051,900
Competitive bids accepted 31,976,347,000
Noncompetitive bids accepted 23,676,900
Fed add-ons 521,441,800
Primary Dealer Tendered 61,448,000,000
Primary Dealer Accepted 11,874,660,000
Primary Dealer Hit Rate 19.3% of what they bid on
Primary Dealer Total Award 37.1 % of total auction
Direct Bidder Tendered 8,400,300,000
Direct Bidder Accepted 3,775,300,000
Direct Bidder Hit Rate 44.9% of what they bid on
Direct Bidder Total Award 11.8% of total auction
Indirect Bidder Tendered 21,468,075,000
Indirect Bidder Accepted 16,326,387,000
Indirect Bidder Hit Rate 76.0% of what they bid on
Indirect Bidder Total Award 51.0% of total auction
NOTE DETAILS
Issued date Feb. 01, 2010
Maturity date Jan. 31, 2017
CUSIP number 912828MK3
Dutch auctions are also called uniform-price auctions. Successful bidders pay only the price of the lowest accepted bid, rather than the actual price they bid as in a multiple-price auction.
Besides an initial move higher in prices, the rates market hasn't really reacted yet. 10s are currently -0-06 at 97-18 yielding 3.673%
The FN 4.0 is -0-05 at 97-16 yielding 4.238% and the FN 4.5 is -0-04 at 100-19 yielding 4.445%. The secondary market current coupon is 4.414%.
The failure of rates to improve after strong auction results would imply my pre-auction theory regarding the unwinding of post-FOMC yield curve flattener positions (PLAIN AND SIMPLE) and the re-emergence of steepener positions is the trade of choice in the rates market at the moment. Its a traders world and we're still living in it.
The yield curve is even steeper after the auction!
There is another obvious factor prohibiting positive progress, stocks have rebounded and are now testing the all important 1087 pivot point.
I am looking for some "bargain buying" support from TSY futures traders to at least help us maintain stability and avoid a reprice for the worse. Unfortunately, if stocks do pick up momentum and break 1087, that support will be muted and we could see lenders get defensive with their rate sheets.