$29bn 7s: Decent Demand. More Reprices for Better Possible

$29bn 7s: Indirects close to average. Dealers make up for light direct bid. BTC near average. High yield 5bps thru 1pm WI.

Not bad, not bad.

Treasury just sold $29 billion 7 year notes.

The bid to cover ratio, a measure of auction demand, was 2.86 bids submitted for every 1 accepted by Treasury. This is ever so slightly below the five and ten auction average of 2.89.  75.8% of the issue was awarded at the the high yield of 2.854%, 0.5bps lower than the 1pm "When Issued" yield of 2.859%. Both of these metrics are indicative of healthy demand for 7s.

Indirect bidders took home 49.7% of the competitive bid as Treasury accepted $14.4bn of the $19.1bn they tendered. This is just below average.

Direct bidders continue to scoff at 7s, adding a below average $1.3bn or 4.5% of the $7.6bn they went after. Compare that tender to $10.6bn at the 1/27/2011 7yr fundraiser, $11.6bn on 12/29/2010, and 10.8bn on 11/24/2010. Less tenders = less interest in buying the issue. 

That left primary dealers to mop up after poor direct bidder demand. The street added $13.3bn or 45.9% of what they bid on. This is above average but not outside the range of recent 7yr auction awards.

Plain and Simple: A little better than average but not a barnburner. Direct bidders have been shying away from the 7-year sector since late October, just before QEII was announced. Indirects, largely viewed as a barometer of overseas demand,  have been pretty stable bidders of longer duration debt, presumably reflecting a continued chase for yield. If interest rates weren't working toward a bullish technical shift, this auction would have been average at best. But when you consider the speed and size of the recent rally...this auction was decent.

Market Reaction...

The yield curve is holding its bull flattening gains. 2s/10s are poking and prodding at 270bps resistance (bullish sign). The benchmark 10 year TSY note is battling an important pivot point at 3.42%. This level has drawn out profit taking this week. It represents our 2nd major hurdle on the push toward 3.31%.  The first being 3.46% and the third being 3.36%. 10yr futures trading volume is high for the third straight day. Today has been the busiest day of the week so far.

In the MBS market, the FNCL 4.5 production coupon is steady just below the intraday high print of 101-25.  Yield spreads haven't moved much on the spot today.

Scattered reprices for the better have been reported. We'd expect to see more if the FNCL 4.5 hits 101-28.