MBS Live Day Ahead: Waiting For a Range Break, and 10yr Treasury Auction

To a significantly greater degree than yesterday's 3yr Treasury auction, today's 10yr auction will have the power to confirm a trend we were beginning to see at the end of last year.  Namely, that investors had finally seen prices fall enough to make buying bonds seem like a good strategic move.  

What would confirmation look like?  There are a variety of ways to assess the strength of an auction, but at 1:01:30pm ET, we'll be looking for the high yield to be below the 1pm "when-issued" yield.  The when-issued (or "WI") 10yr is another version of 10yr Treasuries.  Instead of the buyer receiving the bonds at purchase, they'll receive them when the next crop is issued, typically about a week after the auction.  When-issued trading begins when a new auction is announced.  

Bottom line here is that WI = the expected yield for the auction.  It's one of the most important parts of the auction result.  Then there's bid-to-cover.  This simply measures the ratio of dollars bid vs the total auction amount.  Higher is better.  The ratio of indirect vs direct bidding is also important because it is generally a good proxy for foreign investors.

As always, I put out an "auction preview" on MBS Live that has the targets for WI, bid-to-cover, and Indirects just before the auction.  If there's any sort of a repeat performance of the 5yr auction that kicked off the positive momentum on Dec 28th, we'll know by 1:02pm (the official auction cut-off is 1pm, but results usually don't come out until 1:01:30).

Apart from the auction, there is no significant economic data today, but markets may take a few cues from corporate bond hedging, stocks, and earnings.  In general, bonds are drifting, with 10yr yields waiting for a break, either above 2.42 or below 2.34 to signal the next phase of momentum.