Posted
Treasury just sold $29 billion 7s to a group of uninterested buyers...
Auction demand as measured by the bid to cover ratio was below average. 2.78 bids were submitted for every 1 accepted by Treasury. Compare that to the ten auction average of 2.81 and the five auction average of 2.86.
25.6% of the issue was awarded at the high yield of 2.394%. This was 2.1bps above the 1pm "when issued" bid, a sign that buyers were looking to pay a little less than they did.
Primary dealers took down a much greater award than usual, which explains why the high yield tailed. 48.8% of the issue and 25.1% of what they bid on. Both metrics are above average. This is not indicative of strong buyside demand.
Directs were awarded 8.9% of the competitive bid. That makes them 0 for 3 this week. Indirects took home 42.3% of the auction. Both direct and indirect buyer participation was well below average.
Plain and Simple: I shouldn't have said "uninterested buyers". More or less, yields are so low that bond traders are doing whatever they can to squeeze a concession out of Treasury. From that perspective, it's not surprising to see a lack of buyside interest. This doesn't mean investor demand for risk averse assets is on the decline though, the flight to safety is still strong.
Mortgages certaintly didn't mind the weak auction results. "Rate sheet influential" MBS valuations continue to benefit from one-way trading flows. The August delivery FN 4.5 has printed a new record high price again: 104-14+. I feel like I'm repeating myself over and over again....
The September delivery FNCL 4.0 is +0-07 at 101-26. The FNCL 4.5 is +0-04 at 103-31. The secondary market current coupon is 3.2bps lower at 3.699%. Yield spreads are tighter vs. 5pm "going out" marks but wider vs. spreads yesterday during the "buyers only" parade.
Rate sheets were flat at the open but many lenders already repriced for
the better. Secondary desks who were waiting for the auction to
reprice may delay their recalls now that the 4.0 is off its session
highs, but you're due.
re: related markets
I hinted at this observation this morning but I will expand. The last time 10s broke through 3.00%...it was during an auction week. It just so happened that stocks rallied during that period, mostly thanks to a short squeeze (pain trade). Unfortunately the S&P failed to extend that rally after running into a cluster of technical resistance around 1110. Short sellers then regained control and the floor fell from underneath equities. When the dust settled, the range had played and the flight to safety hadn't lost a step.
Dare I say the same thing is playing out right now?
Here we are, at the end of an auction week, stocks have been led higher by a short squeeze and the 10yr note has traded over 3.00%. But the S&P is now flagging and 10s are retesting the market's
willingness to let yields dip below 3.00%. This tells us higher
benchmark yields have likely been a factor of a lack of new buyers as opposed to a
surplus of sellers. Higher yields have been a function of auction
supply concessions! Money hasn't really flowed out of TSYs. The "flight
to safety" is still strong. Maybe we should stop using the term "stock
lever" and start saying the "bond lever".
Not that it matters to MBS and mortgage rates, which continue to ignore the movements of related markets, but S&Ps are getting whippy and the short base is more than willing to let the market go "bid wanted". If S&Ps don't get some really positive news in the near term to drive the index through 200dma and the 38% retracement, S&Ps will retest 1090. If that level is broken, the next firm level of support is 1075. If this scenario plays out again, 10s should fall back below and hold below 3.00% again...at least until the next round of Treasury debt issuance. Play the range until the range plays you.
Just a thought...
ps. this is my last post of the day. I'm getting in the car and driving to the beach for the weekend. See you in the AM!