7 Year Treasury Note Auction Results and Reactions
The Treasury has successfully auctioned $32 billion 7 year notes. This was the 6th consecutive offering at this size and likely one of the last times as the Treasury is expected to reduce auction sizes in the months ahead.
The bid to cover ratio, a measure of auction demand, was 2.82 bids submitted for every one accepted by the Treasury. This is above the ten auction average of 2.76 and the five auction average of 2.70
Bidding stopped out at a high yield of 3.21%, on the screws with the 1pm "When Issued" yield.
Primary Dealers, aka the street, took 28.3% of the issue. This is way below the ten auction average of 37.9% and the five auction average of 41.2%. This is a positive as it implies dealers were not forced to offset a lack of bidding from other buyers. This is the lowest dealer award since November.
Direct bidders, aka domestic fund managers like Vanguard and PIMCO, were awarded 12.2% of the issue. This is well above the rising ten auction average of 6.9% and the five auction average of 10.7% of total auction. I believe this is the 2nd highest percentage award to direct bidders at a 7yr auction...EVER
Indirect bidders were awarded 59.5% of the auction. This is way above both the five and ten auction averages of 48.1% and 55.2% respectively. This was the best indirect turnout since November.
Plain and Simple: Same story as yesterday, just more pronounced. Strong demand from the right investors at the right yield. Dealers didn't have to do much heavy lifting at all as both direct and indirect bidders showed up in size. Perhaps overseas accounts were aggressively bidding because the 7-year note matches up so well against the duration of "rate sheet influential" MBS coupons? Or maybe I am over thinking it and the huge indirect bidder turnout is a factor of foreign accounts wanting to get their mitts on dollar denominated assets???? The latter seems more likely given the economic environment in Europe.
After the auction stocks are holding near their highs of the day and 10s are moving sideways in the bottom half of the overnight range.
The 3.625% coupon bearing 10 year TSY note is +0-04 at 98-31 yielding 3.751%.
Rate sheet influential MBS coupons are attempting to break firm resistance levels...in both yield spread and price.
The FN 4.5 is +0-01 at 100-15 yielding 4.451%. The secondary market current coupon is 4.437%. The current coupon yield +67.8bps over the 10 year TSY note yield and +69.8 basis points above the 10 yr interest rate swap. The current coupon yield, which performed great yesterday afternoon into this morning, is giving back some of its gains against benchmarks. It appears that traders are happy to range trade "rate sheet influential" MBS coupons between 65 and 70bps over the 10 yr TSY note yield. That yield spread level was hit this morning and positive progress stalled afterward. In terms of price...you can that the FN 4.5 hasn't spent much time above 100-18 this month. We are failing to break that level again today...
Plain and Simple: Both yield spread valuations and outright MBS prices are running into range resistance
Lenders are priced aggressively after locking in their commitments near recent MBS price highs over the past three days. Sticking to our "PLAY THE RANGE UNTIL THE RANGE PLAYS YOU. LOCK AT THE PRICE HIGHS, FLOAT AT THE PRICE LOWS" theory, I would be looking to lock up anything expected to close in the next 15 days.
This is GUTFLOP....