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)....so 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
Accepted at high 14.79 pct
Bid-to-cover ratio 3.33
AMOUNTS TENDERED AND ACCEPTED (dollars)
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.
NOT WILLING TO SLAP FACEMELTER STATUS ON THIS RALLY YET..
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.