The Treasury Department has announced the results of the $44 billion 2 year note auction. This was the fifth consecutive month the auction offer size was $44 billion. The biggest news was that indirect bidders were awarded  53.0% of the auction issue. This was their largest award since June when the short end of the yield curve was battling speculation that the Fed might raise the Fed Funds Rate. Back then, yields had moved considerably higher before the auction, which created a bargain buying opportunity for real money buyers like foreign central banks. This same dynamic occurred before this auction...benchmark yields rose significantly in the days ahead of the auction, creating a bargain buying opportunity for real money indirect bidders (foreign central banks).

Yesterday we talked about China coming back to work following a week long vacation and the possible effects it may have on rates. Asian central bankers are proven "bargain buyers", with that in mind we saw it possible they could instigate a rally if other market participants jumped on board. However, we did not expect it to occur this early in the week. We can thank the trio of bond market friendly tape bombs that hit news wires this morning for this premature recovery rally test. READ MORE about that...

Other auction demand metrics were also strong, the bid to cover ratio was 3.33 bids submitted for every 1 accepted. Primary Dealers took home much less supply than average, this leaves their inventory levels low and in need of new bonds to distribute to their accounts (they need to buy). Direct bidders were also awarded way less than recent averages (which may or may not have been distorted by pass-thru bidding) they will be looking to pick up some supply when the opportunity presents itself.

Here is a recap of the data...

    High                 0.895 pct
    Median            0.865 pct
    Low                  0.800 pct

    Price                                99.960486
    Accepted at high           14.79 pct
    Bid-to-cover ratio           3.33

    Total accepted                                         44,000,005,300
    Total public bids tendered                  146,571,172,800
    Competitive bids accepted                   43,558,832,500
    Noncompetitive bids accepted                  391,172,800
    Fed add-ons                                              1,081,378,100
    Primary Dealer Tendered                     96,000,000,000
    Primary Dealer Accepted                      16,654,832,500
    Primary Dealer Hit Rate      17.4% of what they bid on
    Primary Dealer Total Award       37.9% of total auction
    Direct Bidder Tendered                        14,289,000,000
    Direct Bidder Accepted                           3,572,000,000
    Direct Bidder Hit Rate         24.9% of what they bid on
    Direct Bidder Total Award          8.1% of total auction      

    Indirect Bidder Tendered                    35,841,000,000
    Indirect Bidder Accepted                     23,332,000,000
    Indirect Bidder Hit Rate     65.1% of what they bid on
    Indirect Bidder Total Award      53.0% of total auction

    Issued date    March 01, 2010
    Maturity date  Feb. 29, 2012
    CUSIP number   912828MQ0

Dutch auctions are also called uniform-price auctions. Successful bidders pay only the price of the lowest accepted  bid, rather than the actual price they bid as in a  multiple-price auction.

The reaction in the rates market was a knee jerk spike lower in yields, higher in price. This extends overnight and early morning progress through technical resistance and pushed yields back into the 3.57 to 3.71 range. The 3.625 coupon bearing 10 year Treasury note is +0-26 at 99-13 yielding 3.695%. Now testing the 3.68% pivot.

Rate sheet influential mortgage-backeds are being offered at higher prices, generally playing follow the leader with  benchmark big brothers.

 The FN 4.0 is now +0-17 at 97-25 yielding 4.212% and the FN 4.5 is +0-14 at 100-25 yielding 4.416%. The secondary market current coupon is 4.375%. Yield spreads are firmer on the day, but off early tights. The CC is +67.6/10yr TSY and +58.2/10 yr swaps.


The  manner in which this rally unfolded, forced buying after a trio of tapebombs and overnight bargain buying, is not indicative of a structural shift in rates sentiment. I might call this rally a face melter later in the week if  we are at current levels or lower on Friday. For now the rally is still considered shallow.

If you are floating in the short term, register your loans and stay defensive....obviously the goal is to take advantage of any reprices for the better that have hit or have yet to hit inboxes.   REPRICE FOR THE WORSE alarm bells will start to go off in our heads if 3.74% is crossed in 10s (with volume) and the FN 4.5 breaks 100-16.