Long Bond Fundraiser Shunned as Market Awaits QEII Details

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Treasury just auctioned $16 billion 30s. No bidder displayed a burning desire to buy them.

The bid to cover ratio, a measure of auction demand, was 2.31 bids submitted for every 1 accepted by Treasury. This is below both short and long term averages and is the worst 30yr BTC ratio since October of 2009.

82% was awarded at a high yield of 4.32%. This is almost 3bps above the 1pm "When Issued" yield. This is a sign that Treasury had to greatly lower their asking price to attract demand.

Dealers added an above average 50.8% of the competitive bid and 34.3% of what they bid on. Both metrics are above average. Combine that with the weak BTC and long tail and it's obvious dealers were forced into adding this inventory. An unwelcome surprise...

With a 10.8% takedown, direct bidder participation improved from the previous two auctions but remains below average. Directs were awarded 33.3% of what they bid on.  Again this is an unwelcome surprise.

Indirect buyers took home 38.4%of the competitive bid and 76.3% of what they bid on. Both metrics are above normal. Indirect accounts look like willking buyers but they wanted to get the best deal they could. This is a positive as it implies the overseas bid is sticking with US debt.

We expected this....

Remember what happened after the FOMC statement was released? 

Long Bond Ripped as Fed Focuses Buys on Belly. DON'T PANIC!!!

Plain and Simple: the Fed will not focus their QEII purchases in the ultra long-end of the yield curve. Why buy 'em, especially if you're worried about long term inflation? 86% of their asset lifts will hone in on the 2s to 10yr sector of the curve with 46% of coupon lifts targeting the "rate sheet influential" 5-10yr sector.

So, yeh, we weren't expecting a barnburner of a bond auction today, especially after the apathetic turnout that was seen at the 10 yr note auction yesterday (which wasn't all that bad if you consider the overseas support we got, indirect buyers were not shy about bargain buying!)

But like I said...the auction wasn't well subscribed. Fortunately the market's reaction is somewhat encouraging.

Initially, 10yr yields shot to session highs and rate sheet influential MBS coupon prices dipped to new session lows. TSY yields and MBS prices have since corrected and we're sitting in the middle of the intraday range.

The Fed announces QEII details at 2pm. Again. I am not panicking people. The Fed could start buying Treasuries as soon as Friday (more likely Monday). That tidal wave of buying will be overwhelming in the Treasury market. The recent move higher in yield was NOT predicated on massive repositioning from long to short. The herd is still crowded into the QEII trade. This move was driven by day trading short sellers (black boxes). It's the same behavior we witnessed after QEII got a little overheated in mid-October. That sell off was driven by day traders too. It reversed course.

MY POINT: Yes I hear all the anti-QEII rhetoric. It's hard to tune out when people email you and say "my entire shop is depending on you AQ". The economic and events calendar is slow. Treasury auction concessions are the primary motivation in the bond market. And we just had a mid-term elections. Now politicians and anti-Fed policy economists everywhere are feeding on the attention and ripping the Fed's actions.  This sentiment was and still is a threat we'll be dealing with on a regular basis.  I discussed it HERE. But we can't forget how the bond market is positioned. LONG. We can't forget just how overwhelming these asset purchases will be on the Treasury market.  Unless the Fed says, "we take QEII back", I don't see how the bond market will fight this once the program actually starts.  Details to be released at 2pm....

Still waiting for shorts to be washed out of market. We're gonna need some chunky purchases soon....