MBS LUNCH: 30 Year Bond Auction Results and Reactions

By: • Thu, Mar 11 2010, 1:09 PM

The previously discussed auction concession must have been sufficient because the long bond auction went very well. Overall, auction demand was well above average---2.89 bids were submitted for every one accepted by the Treasury. 82% of the auction was taken down at the high yield of 4.679% (dealer bids).

I should share the auction caveat before going any further....success was driven by a hungry bid from from direct buyers who took home a record 29.5% of the issue. This massive support offset a very weak turnout from Indirect bidders, who were awarded only 23.9%. Primary dealers got 46.4% of the $13 billion...below average

Here is a recap of the results:

29-YEAR 11-MONTH BONDS

YIELDS
    High           4.679 pct
    Median      4.645 pct
    Low            4.580 pct

PRICE/ACCEPTANCES
    Price                          99.128159
    Accepted at high      82.80 pct
    Bid-to-cover ratio     2.89

AMOUNTS TENDERED AND ACCEPTED (dollars)
    Total accepted                              13,000,003,100
    Total public bids tendered            37,616,887,100
    Competitive bids accepted           12,978,916,000
    Noncompetitive bids accepted            21,087,100
    Fed add-ons                                    153,804,000

    Primary Dealer Tendered            24,033,200,000
    Primary Dealer Accepted               6,026,600,000
    Primary Dealer Hit Rate           25.1% of their bid
    Primary Dealer Total Award   46.4% of issuance

    Direct Bidder Tendered                6,576,000,000
    Direct Bidder Accepted                 3,848,000,000
    Direct Bidder Hit Rate              58.5% of their bid
    Direct Bidder Total Award      29.6% of issuance

    Indirect Bidder Tendered           6,986,600,000
    Indirect Bidder Accepted              3,104,316,000
    Indirect Bidder Hit Rate          44.4% of their bid
    Indirect Bidder Total Award 23.9% of issuance

The 10 yr note's initial reaction was a sharp decline in yields, a new intraday low was established. However that positive progress soon faded and yields are now moving back toward a test of the 38% retracement level at 3.734%.

This choppiness in the basis led "rate sheet influential" MBS prices to new intraday highs and then quickly back to pre-auction price levels. The FN 4.5 is back in its sideways channel....-0-02 at 100-29.

I am sticking to our speculative theory. There was a decent volume spike at the two day10 yr futures contract price lows which only lasted as long as it took for prices to reach the top layer of "positional resistance". Once the market can muster the strength to take out that "positional resistance" ...there will be more room for futures prices to push higher and cash market 10 year yields to run lower. Watching and waiting...