7-Year Note Auction Met with Healthy Demand. Indirects Bidders Chase Higher Returns

The Treasury just auctioned $29 billion 7-year notes at a high yield of 1.989%. This is 0.5bps below the 1pm "When Issued" yield, a sign of strong demand. The bid to cover ratio was 2.98 bids submitted for every 1 accepted by Treasury. This is above average and another sign of strong demand.

Indirect accounts were once again the most supportive bidders, taking home an above average 56.7% of the issue. Direct bidders were awarded 8.6% of the auction. This is below average and the fourth consecutive 7-year note auction where direct account participation has declined.  Primary dealers were awarded a below average 34.8% of the competitive bid and 18.4% of what they bid on.

Plain and Simple: This was the best auction of the week. Indirect bidders were the primary source of auction demand. Indicating overseas real money buyers are still chasing returns in the long end of the yield curve. This has been a consistent theme since the Fed announced QE lite two weeks ago.

Immediately after the results were released the yield curve flattened as 10s rallied down to 2.50% resistance. The 2.625% coupon bearing 10 year note is currently +0-04 at 100-28 yielding 2.527% (-1.2bps).  Rate sheet influential MBS coupons trade much better when 10s are over 2.50%.

 The October FNCL 4.0 MBS coupon is +0-03 at 102-21 and the FNCL 4.5 is +0-04 at 104-10. Production MBS coupon yields are tighter vs. TSYs and swaps.

The FNCL 4.0 trend channel continues to consolidate before Bernanke. If I had to guess where October 4.0s would close today, I would say 102-16.

THIS POST shares more perspective on the days ahead.