Softer Demand at 3-year Bond Auction in Another Week of Heavy Supply

U.S. Treasuries saw underperformance in longer tenors lifting yields on 10s and 30s back to last week’s highs while the 2-yr yield remains five basis points below its high from last Tuesday. U.S. Treasury sold $44 bln in 3-yr notes to fair to meddling demand, the high yield (4.660%) tailed the when-issued yield by a basis point and indirect takedown was below average. The bid-to-cover ratio exceeded the prior 12-auction average. Early the New York Fed released its latest Survey of Consumer Expectations, which showed year-ahead inflation expectations was up by fewer than ten basis points to 3.6% while the three-year outlook dipped by ten basis points to 2.8%. The desk gave a B- rating on the auction.

The U.S. Treasury is working to replenish its General Account with an estimated $1 trillion of Treasury issuance due to the debt ceiling impasse.

The bid to cover 2.75X vs. 12-month average of 2.67X, indirect takedown 57.7% versus 12-month average of 63.5%. The desk gave a C- rating on the auction.

Auction Highlights

  • Duration: 3 Years
  • Amount:  $44 billion
  • High yield: 4.660%
  • When-Issued level at the time of the auction 4.159%
  • Tail 0.9 basis points versus six-month average of 1.4 basis points
  • Bid to cover 2.75X vs 12-month average of 2.67X
  • Directs 22.1% vs 12-month average of 18.8%
  • Indirects 57.7% versus 12-month average of 63.5%
  • Dealers 20.2% versus 12-month average of 17.7%

Auction grade: C-

  • Directs a measure of domestic demand
  • Indirects a measure of international demand
  • Dealers take the balance

Yields after the Auction.

  • 2-yr: +2 bps to 4.99%
  • 3-yr: +1 bp to 4.70%
  • 5-yr: +2 bps to 4.41%
  • 10-yr: +3 bps to 4.29%
  • 30-yr: +5 bps to 4.38%

Yields Before the Auction.

  • 2-yr: +2 bps to 4.99%
  • 3-yr: +1 bp to 4.70%
  • 5-yr: +1 bp to 4.41%
  • 10-yr: +3 bps to 4.28%
  • 30-yr: +4 bps to 4.37%

Average results of previous 12 auctions:

  • High yield: 4.159%
  • Bid-to-cover: 2.67
  • Indirect bid: 63.5%
  • Direct bid: 18.8%

Prior auction results:

  • High yield: 3.857%
  • Bid-to-cover: 2.53
  • Indirect bid: 67.7%
  • Direct bid: 19.9%
  • Directs a measure of domestic demand
  • Indirects a measure of international demand
  • Dealers take the balance
Bond Traders Weekly Outlook: Global Bond Market Liquidity Deleveraging

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