MBS Live Recap: Well-Receive Treasury Auction: Chicken or Egg?

This week continued in the fine tradition of of ultra-light summertime volume and liquidity, but today's contribution was a bit more worthwhile than the previous 2 entries.  Today, at least, had the 10yr Treasury auction--the heretofore most important event of the week for bond markets.  

This was the biggest 10yr auction in history--not in terms of importance, but in terms of the outright amount being auctioned.  How would markets digest this glut of issuance on an illiquid summer trading week that was already seeing a bigger-than-expected surge in corporate bond issuance?

As fate would have it, markets coped pretty darn well.  There was no meaningful sell-off ahead of the auction, and the stats were definitely on the strong side.  Despite that, we didn't have any meaningful relief rally afterward.  This begs the question: was the auction strong because traders are ready to turn recent bond losses around and go on buying spree?  Or was it strong because bonds had gone on enough of a selling spree in the past 3 weeks?  The absence of a big follow-through rally suggests the latter, but there's still some small chance that additional buyers could be waiting for the rest of the week's events.  

As for today, 10yr yields dropped just over 1bp, but failed to challenge the 2.95% technical level.  Fannie 4.0 MBS gained an eighth of a point to close at 101-21 (101.66).