Debt Investors Ignore Expensive Price Tags. Appetite for Risk Aversion Remains Healthy

Treasury just sold $29 billion 7-year notes. This issue amount was unchanged from the previous 7-year note fundraiser. 

Auction demand as measured by the bid to cover ratio was 3.04 bids submitted for every 1 accepted by Treasury. This is well above average and the highest btc ratio since the 7-year note was reintroduced in February 2009.

The auction high yield was on the screws vs. the 1pm "when issued" mid-market yield of 1.89%. While this would normally be indicative of average demand, I must remind that 7s are trading at record low yields. U.S. debt buyers don't seem to care  how expensive the debt is....they are still lining up to buy.

Primary dealers added $10.5 billion in new inventory. This works out to 36.4% of the competitive bid, which is slightly below average. Also, dealers were only awarded 18.1% of what they bid on, this implies the street was trying to generate as much of a concession as possible (wanted cheaper price). Fortunately non-dealer demand was aggressive enough to keep yields from rising fast.

After fading in 5 of the previous 6 auctions, direct bidder participation finally picked up! Directs took down 13.4% of the competitive bid and 36.3% of what they bid on. Both of these metrics are above average.This is the most aggressive directs have been for 7s since March.

Indirects took home 50.2% of the auction and 75.9% of what they bid on.  This is an average turnout but somewhat disappointing. 

Plain and Simple:  Price concessions were minimal ahead of the auction but demand remained strong, regardless of record low yields. Looking a little deeper, indirect bidding was a bit light relative to recent 7yr auctions, but excess supply was soaked up by direct buyers. It's good to see them back in the action, let's hope it lasts. 

We had three Treasury auctions this week. All three issues were offered at record low yields, yet demand remained strong. Makes you feel like mortgage rates will be low for an "extended period" doesn't it?

Market Reaction...

10s rallied from session yield highs back to the middle of the overnight range. The next directional move seems like it will not be friendly to loan originators.

November FNCL 4.0s bounced from session price lows  back up to 102-20 resistance, where positive progress has stalled. I smell lower prices in the future, this should help draw out fast$ buying (on spread).