• Overall demand for today's 2yr auction a bit weaker. Investor want higher yields
  • Despite the weak auction, trading levels continue in a sideways or even slightly stronger path.
  • FN 4.5's are up 10 ticks on the day at 102-13
  • That's 5 ticks from the all time closing high.
  • 10 yr yields are down about 6 bps at 3.13
  • Stocks remain catastrophically lower, dow/200  S&P/20. 
  • Evidence of expected support at 1150 S&P is, well....  Evident.

AQ's auction wrap:

The Treasury has successfully auctioned $42 billion 2 year notes. This was $2 billion less than the previous seven 2 year note auctions. 

The bid to cover ratio, a measure of auction demand, was 2.93 bids submitted for every one accepted by the Treasury.  This is below the ten auction average of 3.09 and the five auction average of 3.08.

Bidding stopped out at a high yield of 0.769%. This is almost 1 basis point above the 1pm "when issued" bid.  A sign that the market felt yields were too low.

Primary Dealers, aka the street, took 48.6% of the issue.  This is above the ten auction average of 46.2% of the total auction award and above the five auction average of 45.8%. The fact that dealers took down more inventory than usual implies demand was below average and also explains why the high yield was above the 1pm "when issued" yield. Dealers always bid on inventory...they just didn't want this issue to yield under 0.75%.

Direct bidders, aka domestic fund managers like Vanguard and PIMCO, were awarded  15.2% of the issue. This is well below the 21.4% award seen at the most recent 2 year note auction but still above both the five and ten auction averages of 14.7% and 12.4% respectively

Indirect bidders were awarded a 36.1% of the auction. This below the five and ten auction averages of 39.5% and 41.4% respectively. 

Plain and Simple: the high yield was a record low for a 2 year note auction...these returns were too low to attract investors. While this wasn't a great  auction, it is not indicative of a shift in sentiment. U.S. Treasury debt is still considered the safest investment on the planet and demand is still high....just not when yields are so low. 


From MG with love:

In and of itself, the auction wasn't good, at least not when comparing metric to metric vs recent averages.  But how much should we have expected those metrics (like BTC and PD %'s) to be skewed by the low yield?  Apparently a lot, because despite the crappy auction (in and of itself), bonds continue to trade as well or better than pre-auction levels.

MBS are near all time closing highs.  Treasury yields are trading under 3.15.  The curve is staggeringly flatter.  Maybe it's time for a new version of "it that shall not be named."  Only this time, it will refer to some form of a double dip recession or at least a healthy bull market correction.  Far too early for the former, but we're certainly in the midst of the latter. Check out stocks as an indicator of that...

unfortunately for bonds, 1050 was expected support for stocks, and so far, it looks to be holding.  In a world where the stock lever matters, that removes a feather from treasury's hat. 

Whereas stocks hint at SUPPORT just below current levels, treasuries might be contending with some technical RESISTANCE just below current levels... Better case scenario is a close below that lower red line and with decent volume.

Even if that happens, we remain skeptical about MBS ability to push the limits of all time closing highs, even in this uncertain environment.  We'll talk more about that later (a lot more), but for now, it's of some comfort that MBS have left a clear trial of breadcrumbs back to some pivot-based support from recent movements.  We can watch these horizontal lines as sort of "floors" that can serve as good short term lock indicators.