3-Year Treasury Note Auction Results and Market Reactions
The Treasury just auctioned $35 billion 3-year notes. This round of official fundraising was $1 billion less than the June 3-year note auction and $4 billion less than the April issue.
Although the bid to cover ratio, a measure of auction demand, was above average (3.20 bids submitted for every 1 accepted), investors were less interested in supporting the Treasury's funding needs, at least not without receiving a healthy discount first. This is represented in the auction high yield of 1.055%, which is almost 2 basis points above the 1pm "When Issued" yield. Still, extra price/yield discount or not, this was the lowest "high yield" on record for a 3-year auction.
Indirect bidders were the weakest link, taking home a below average 40.6% of the issue. Primary dealers were forced to pick up the slack, they added $15.7 billion 3s to their inventory which constitutes 45.1% of the total auction and 19.7% of what they bid on...both metrics are above average. Direct bidders added 14.3% of the total issue and 45.5% of what they bid on....this is above average but a less robust award than than the previous three 3-year note auctions.
Plain and Simple: Auction demand can't be classified as weak because of the above average bid to cover ratio, but one might say the reduction iof indirect bidder participation and forced increase in dealer bidding is another sign that the short end of the yield curve is overbought. Also, based on Fed primary dealer data, the street was running low on 3-year note (and less) inventory...so it appears dealers may have been more proactive than usual because they needed to cover shorts, but did not want to pay an arm and a leg. More or less...the simple explanation is the 3-year note (and the 10-year and the long bond) looked expensive and non-dealer bid side interest was not willing to pony up the extra points while the market's risk appetite was shifting.
After the auction...
Stocks are attempting to breakout of their recent range, benchmark interest rates are higher, the yield curve is steeper, and rate sheet influential MBS prices are holding steady.
S&P futures are +2.50 at 1075. The intraday high is 1077.25. Volume isn't anything to write home about though...
The 3.50% coupon bearing 10 year TSY note is +0-04 at 103-27, 1.3bps lower in yield at 3.045%. Price action has been all over the place in VERY LIGHT VOLUME....but the range is containing chopatility.
Rate sheet influential MBS coupons are holding steady regardless of choppiness in benchmarks. The August delivery Fannie Mae 4.0 MBS coupon is +0-05 at 101-10 and the August delivery FN 4.5 is +0-05 at 103-20. The secondary market current coupon is 2 basis points lower at 3.78% and yield spreads are tighter. Here are my marks: +73.7bps above the 10yr TSY note yield and +68bps above the 10yr interest rate swap. If 10s close outside their recent range I would expect to see the FN 4.5 fall back below 103-18.
If you're floating and looking for directional guidance, I still think rates move higher in the day's ahead...