The Treasury has successfully auctioned $32 billion 7 year notes.

"Successfully" means the auction did not fail....demand was poor though.

The bid to cover ratio, a measure of auction demand, was 2.61 bids submitted for every one accepted by the Treasury.  This is below both the five and ten auction averages of 2.72 and 2.79 respectively.

Bidding stopped out at a high yield of 3.374%. This was way above the 1pm "when issued" bid. A sign of poor auction demand...regardless of the massive concession that was priced in over the past 24 hours.

Primary Dealers, aka the street, took 50.0% of the issue.  This is well above the ten auction average of 39.2% and the five auction average of 38.6%. Just like the 2 year note auction and the 5 year note yesterday, dealers took home too much debt. While dealers don't mind a chunky award, there is such a thing as too much of a good thing. We do not want the street taking down higher percentages of the auction because they will need to get rid of excess supply...and they will not do it at cost.

Direct bidders, aka domestic fund managers like Vanguard and PIMCO were awarded 8.1% of the issue. This is above the ten auction average of 6.4% but below the five auction average of 9.8% and well below the direct bidder awards of 17.2% and 11.8% at the previous two 7 year note auctions.

Just like the 2 yr note and 5 yr note, indirect bidders were awarded a paltry percentage of the auction. They took home 41.9% of the issue.  This is well below both the five and ten auction averages of 54.4% and 51.6% respectively. This happened at the previous 7 year note auction when indirect bidders took 40.3% of the issue...before that indirects were running in the high 50 to low 60% range. On top of that...indirects submitted way less bid$.

Plain and Simple: Same as yesterday. The bid to cover was light considering how much this issue cheapened prior to the auction. Blame a seller dominated marketplace for that, traders saw an opportunity to push yields higher/prices lower...they clearly took it. The auction high yield confirms this theory. Dealers took down too much debt again, they will be forced to sell this inventory into a buyers market, which means they must adjust their offer price lower to attract demand. That pushes yields higher. Dealers will likely wait to distribute this supply until sellers are washed out of the marketplace. Direct bidders took a big step backward after strong turnouts at the previous two 7 year note auctions. That is a bit concerning. Indirect bidders have been M.I.A all week. That will spark some discussion about foreign demand from China. Perhaps our wishes that China unpegs their currency is forcing them to demand higher real rates of return? Or maybe they are just mad at us. 

Here are the results...

High        3.374 pct
Median      3.289 pct
Low         3.229 pct

Price                       99.232610
Accepted at high        83.04 pct
Bid-to-cover ratio             2.61

Issued date    March 31, 2010
Maturity date  March 31, 2017
CUSIP number   912828MV9
Total accepted                       32,000,004,700
Total public bids tendered       83,368,964,700
Competitive bids accepted      31,954,140,000
Noncompetitive bids accepted        45,864,700
Fed add-ons                           1,082,468,000

Primary Dealer Tendered        59,057,000,000
Primary Dealer Accepted         15,982,000,000
Primary Dealer Hit Rate       27.1% of their bid
Primary Dealer Award          50.0% of issuance

Direct Bidder Tendered             7,968,000,000
Direct Bidder Accepted              2,593,000,000
Direct Bidder Hit Rate          32.5% of their bid
Direct Bidder Award              8.1% of issuance     

Indirect Bidder Tendered        16,298,100,000
Indirect Bidder Accepted         13,379,140,000
Indirect Bidder Hit Rate       82.1% of their bid
Indirect Bidder Award         41.9% of issuance

It is not a huge surprise to see such poor turnout given the events that unfolded yesterday in the rates market. Between then and now, no base has been put in below interest rate prices...this means there is no floor to stop selling yet. I am hopeful the completion of  this round of auction supply will help wash out sellers and draw in bargain buying. Whether or not this occurs before or after 10s hit 4.00% is not clear. It is a possibility though.

The 10 year TSY note hit a new intraday yield high of 3.905% before falling back below 3.90%. Currently the 3.625% coupon bearing 10 year note is -0-08 at 97-29 yielding 3.884%.Remember our range outlier target is  4.00%.

The FN 4.5 initially hit an new intraday price low at 99-26+ before bouncing back to 100-00.


The belly of the yield curve continues to be the weakest sector on the spot curve. This is the most "rate sheet influential" part of the yield curve.

Several lenders repriced for the worse before the auction...the longer MBS prices sit near the lows of the day....the more reprices we will see.

I will be updating this post with more auction color and shifts in trade flows.