Earlier today on MBS Live, after briefly discussing the results of today's 10yr Auction, a question came up basically asking if I could explain what I was talking about in English. Although I'm not sure if it's much of an improvement from the original Greek, this was my answer, compiled and formatted for the blog:
"When-Issued..." The Primary Means Of Establishing an Auction's Expected Yield
When it comes to talking about auction results, and especially the concept of "expected" vs "actual" results, there are now TWO different yields that come into play. The first set are the normal yields that flash on your screen (and on TV, etc...) and then there's the "when-issued" market, which is like the market's bet on where the auction will
stop. According to the "The Joint Report on the Government Securities Market"
(by Treasury, SEC, and Fed Governors), when-issued trading "reduces uncertainties
surrounding Treasury auctions by serving as a price discovery mechanism. Bidders look to when-issued trading levels as a market
gauge of demand in determining how to bid at an auction" and also helps Treasury by "stretching out the actual distribution period for each issue,
allowing the market more time to absorb large issues without disruption". If dealers are able to sell to investors on a when-issued basis, it effectively puts the ball in the dealers' courts at auction to pick up the pre-sold supply, thus "concentrating bidding interest in the hands of market participants that
have a substantial financial incentive to identify correctly the price
that balances demand with supply."
All that said, you can simply think of "when-issued" or "WI" as analogous to a consensus estimate for an economic report. It's the running guess at where the auction's high-yield will stop. The word STOP is important too because it
doesn't just mean that the auction is over, but specifically has the
connotation of the "awarded high yield."
Why is HIGH YIELD important?
Shortly after the auction, anyone can view the results on
www.treasurydirect.gov. (Today's for example:
http://www.treasurydirect.gov/instit/annceresult/press/preanre/2012/R_20120111_1.pdf) Although a "low yield" and "median yield" are displayed, it's
the "high yield" that is the important one. The word "stop"
shares the correlation with the "high yield" because Treasury auctions are a Dutch Auction process where bidders submit the minimum yield they're willing to
accept and the auction moves higher and higher in yield until all the money
requested by Treasury has been committed by investors. Thus the auction "stops at the high yield."
BUT! There's another tricky connotation to be aware of with
the word "stop." Generally, when the high yield is lower
than the when-issued (or "WI" yield), the auction is referred to as having "stopped through" or "traded through." In this case "stop" carries an implicitly positive
connotation. The The opposite of this sort of "stop through" is a
"tail." In other words, if the yield stops at a HIGHER level than
when-issued, the auction is said to have "tailed." Bottom line, auctions either "stop through" or "tail," unless they hit the when-issued yield (measured just before results are released) exactly in which case, most refer to the auction as being "on the screws." Note that the result can also be referred to in NOUN form as such: "there was a tail" or "there was a stop-through." Some refer to a stop-through as a negative tail as well.
Bid-to-Cover and Other Sources of Expectations
As far as the other metrics that allow us to say such things
as "better-than-expected" etc... that comes simply from an
examination of past performance. There are numerous components of each auction that are measured, such as bid-to-cover, % of the total amount awarded to dealers vs. non dealers, % of those awards vs amount bid (aka: "hit-rate"), and more. Probably the most important and easiest-to-understand among these would be Bid-to-Cover, sometimes shorthanded as BTC. This is
essentially a measure of how many dollars of bids were submitted (or "tendered") for each dollar auctioned. More simply, if there were $60 bln in bids but Treasury was only auctioning $20 bln, the BTC = 3.0. With respect to the expectation of current auctions' bid-to-cover ratios and other metrics, we're simply adding up the past few auctions and taking averages to establish recent norms. Some people take the last 4, others look at last 5, last 8, last 10, etc... Some differentiate between re-openings and refundings
For the average savvy Loan-Officer who is merely seeking to understand some of the market forces underlying MBS movement, most of the more detailed aspects of examining Treasury Auctions are not important. It is enough to know how healthy the demand was using the actual vs historical bid-to-covers in conjunction with where the high-yield stopped versus the when-issued yield. Beyond making an effort to internalize those two concepts, familiarizing yourself with the finer points of Treasury Auctions is not something for the average LO to stress over. Learn about it as you like, but keep in mind that the most important observation that can be made about any Treasury auction is HOW THE MARKET TRADES THE DATA AS OPPOSED TO THE DATA ITSELF. This is true of so many economic events. And although deeper examination of such economic events and market reactions can help us develop a broader sense of what's going on in the markets, we're ultimately most concerned with MBS Prices than anything else. A Treasury auction might have crushed expectations, but knowing and understanding that won't protect you from negative reprices if MBS are falling in spite of a strong auction.