Auction Concessions Build After Dealers Support 3-Year Note Issue

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Joe Paterno got his 400th college football win this weekend. Everybody stop and pay your respects to the man HERE: JoePa achieves legendary feat

PSU plays Indiana at FedEx Field in two weeks. I will be attendance to show my appreciation for JoePa's leadership and my alma mater.  I'll be the dude rocking PSU gear, say hello if you see me! (lmao. I love it when people ask me "oh you went to PSU? Do you know so and so?" FYI there were 45.000 kids enrolled at main campus when I was there, hell no I don't know so and so!

What a slow start to the week....only 520,000 10s have traded in the futures market as of 1:25pm.

Treasury just kicked off this week's trio of refunding auctions with $32 billion 3s.

The bid to cover ratio, a measure of auction demand, was 3.26 bids subitted for every 1 accepted by Treasury.  That's a strong turnout for 3s.

The high yield was 0.575%, which basically on the screws vs. the 1pm "When Issued Yield". 

Primary dealers did most of the heavy lifting, taking down $16.3 billion or 51.1% of the issue. This is an above average award to the street but dealers were also more aggressive in their bidding with a 22.9% hit rate, suggesting the street was looking to add inventory or cover shorts.

Directs picked up 13.9% or $4.4billion. This is a slightly below average award but better than the previous two 3yr note auctions. Direct bidders weren't too assertive overall, they only saw 31% of their bids filled. 

Indirects took home 35% or $11.2billion. This is a below average award but a 7% improvement from the previous 3yr note auction where indirects added only 28.9% of the overall issue. Indirect bidding was apathetic still, only 59.8% of their bids were accepted by TSY. This is a below average hit rate.

Plain and Simple: Directs and Indirects seemed hesitant to chase after the short end of the curve but dealers were aggressive, which kept the auction from getting sloppy.

Market Reaction...

Yawn.  Both "rate sheet influential" MBS coupons and the belly of the yield curve have been stationary for most of the day.  This is to be expected after the roller coaster ride we went on last week, but we are seeing a modest move lower in price/higher in yield in the aftermath of the auction

5s are -5/32 at 100-19 yielding 1.125%. 7s are -2/32 at 100-21 yielding 1.775%. The 10yr note is -4/32 at 100-19+ yielding 2.554%.  The 2s/10s curve is 2bps flatter at 215bps. In the chart below I have illustrated the slow sideways meandering move higher along the 62% retracement line. This follows another clear rejection of 2.46% resistance...keep that level in mind if 10s rally. On the other side of the spectrum, 2.59/2.60 is major support.  It looks like we'll see 10s at least retest 2.56% today if not 2.60%

Today is 48 hour notification day for Class A MBS coupons. This means Fannie and Freddie 30yr MBS coupons will begin the settlement process. If you've been an MBS commentary blog reader for long enough you know that I like to have a little fun when price levels drop as the back month becomes the front month delivery coupon. I won't do that today because of the sensitive sentiment of mortgage rate watchers, just beware that its coming this afternoon.

The December delivery FNCL 3.5 is trading 5/32 lower at 100-14 and the FNCL 4.0 is -3/32 at 103-04.  Production MBS coupons are mostly UNCH vs. 5s and 10s but are outperforming 10yr swaps.

Not much newness out there to motivate the bond market, combine that with a modest decrease in open interest in the 10yr note and it seems like we're dealing profit taking and auction concessions ahead of $24 billion 10s tomorrow.

Plain and Simple: no reason to fade the Fed, we're just seeing traders price in a pre-auction concession.