Treasury just completed its last coupon auction of the year with a $29 billion 7-year note offering. Indirect bidders stole the show, taking home an 18 month high 64.2% of the competitive bid. This is well above average. So far above average that one has to wonder  if indirect bidders were actually that aggressive or if dealers and direct buyers were totally apathetic to the issue because they didn't need to bid on it. 

Dealers took down an 18 month low 31.2% of the competitive award and 18.8% of the paper they bid on. Directs added a 14 month low 4.6% of the issue and 11.5% of what they bid on. Both of these metrics indicate dealers and directs were either uninterested or they were out bid by Indirects. I'd have to assume the pre-auction TSY market rally was a sign that dealers and directs were covering their short positions when they saw the opportunity, thus leaving indirects to underwrite the majority of the new issue.

80.16% was allotted at the high yield of 2.83%. This is 1.5bps below the 1pm "When Issued Yield" of 2.845% (I saw the WI dip to 2.818 at 12:59). The bid to cover ratio was 2.86%. This is a bit below average but better than the November auction.

Plain and Simple: it really looks like dealers and direct accounts were doing some bargain buying (short covering) before the auction and went quiet during it. Besides the fact that indirects upped their tenders by a whopping $8 billion vs. the November issue, I have no other explanation for why indirects would've taken home such a large chunk other than apathetic interest from dealers and directs, not with the bid to cover coming in below average and 80% of supply being awarded at the high yield.

Either way, the auction was strong and rates are rallying in the aftermath as investors look to have been caught off guard and are now scrambling to cover their short positions which has added steam to the rally.

The 10 year note is up a full point in price at 93-26 yielding 3.366%. That is a 14bp swing in yields vs. yesterday's highs. FNCL 4.5s are +25/32 at 102-03.

If you haven't seen reprices for the better already, you will soon. If you need to lock in before January 7th, you are looking for 4.75% on C30 paper and 4.625% on FHA 30 year fixed (maybe 4.50 on FHA 30 year fixed GN I's)

So far this rally smells like a short squeeze so don't get overly excited until we see a little more volume and better money flows to put support under prices. Our year-end target is 3.31%....that is within reach but we remain defensive of further strength.