Absence of Indirect Bidders Obvious in 5-Year Auction. MBS Hit Session Lows

By: Matthew Graham •

AQ Comments on the auction:

Well. If there was ever a time to say the indirect buyer category reflects overseas bidding interests, now would be the time. Indirect accounts were awarded a 20-auction low 31.5% of the competitive bid in today's 5-year note auction. The bid to cover ratio, a measure of auction demand stunk up the joint with a five auction low, below-average 2.65 bids submitted for every 1 accepted by TSY. The obvious question is: DOES THIS HAVE ANYTHING TO DO WITH JAPAN BEING OUT TODAY? The easy answer is yes. So I say yes until proven otherwise in the overnight session. The absence of these real money buyers left more opportunistic investors to herd the TSYs $35 billion offering. It seems like those two auction buyers had their concessionary ways with TSY by letting their bid get hit repeatedly. That would explain the 1.8bp tail vs. the 1pm WI yield. Other demand metrics weren't too bad though. Both dealers and directs took down above-average awards at above average hit rates . I say this auction was more of an organized last minute arm twisting of the TSY rather than a sign of weakening investor demand for 5yr notes.

  • High Yield 1.411 %
  • 6.37% of bids accepted at high yield
  • Bid To Cover Ratio: 2.65
  • Primary Dealers take 52.9% and Directs take 15.6% of the $35 billion dollar offering

Initial Market Reaction...

Initial price action following the auction has been choppy, and skewed a bit toward losses for the bond market.  MBS  had an opportunity to hold it's ground on an intraday pivot based on yesterday's high prices, but have since fallen to test that 101-26 price once again.  Still... until MBS prices break definitively into yesterday's range, we should consider it supportive. AKA, 'you're my friend until you're not any more.

Sadly, even the weakness seen thus far may be sufficient cause for more than a few lenders to reprice.  This would be especially frustrating if the upcoming FOMC minutes help reverse course.

Granted MBS haven't broken into yesterday's range definitively YET, but being at the lows of the day, the risk is present.  In my mind, the risk is a bit more developed than the MBS chart suggests due to the fact that the 10yr chart suggests a similar test of intraday pivots, which would put enough of a drag on MBS (probably) to make reprices a near certainty.

FOMC minutes follow in less than an hour, and could compound our problems or simply bump us back up into this morning's previous range.  Moral of the story: we're one leg down in today's race at this point...  There may not be a good chance to win, but merely to finish where we started.