Ten-Year Note Auction Met With Strong Reception
Investors snapped up $21 billion in 10-year notes in a solid auction.
The yield of 1.652 percent for the reopened 10-year was the third lowest borrowing cost at auction. Direct participation, which could include institutions and foreign central banks, was a high 42 percent, well above the recent auction average of 18 percent. Indirect bidders were at a low 24.2 percent, well below the 10-auction average of 40 percent and the lowest since April, 2009. The bid to cover was 2.95.
The strength of the auction bodes well for Thursday's auction of $13 billion 30-year bonds. The bid-to-cover ratio at November's 30-year auction was 2.77, the highest in a year. Treasurys pared earlier losses after the auction.
"I think people will be very worried about being short the market. It was obviously a very strong auction," said Brian Edmonds, head of interest rate trading at Cantor Fitzgerald. "Direct bids were big and it stopped through."
The Federal Reserve met market expectations with another round of easing, this time with a pledge to keep interest rates low until unemployment falls below 6.5 percent and inflation tops 2.5 percent. Economists had been expecting the Federal Reserve to accelerate its debt buying program, known as quantitative easing, to the tune of another $45 billion a month, and the central bank came through.
"I think the positives are we backed up the last couple of days. Positive is that most of the street, including us, expects the Fed to continue with outright purchases (of Treasurys) into next year," said John Briggs, senior Treasury strategist at RBS.
Starting with Tuesday's $32 billion three-year auction, the Treasury is auctioning $179 billion in notes and bonds through next Thursday. There is also a $14 billion five-year TIPS auction next week. The three-year auction saw good demand and a yield of 0.327 percent, the lowest on record for an auction.
"You have a lot of auctions coming very quickly — 10s and bonds today and tomorrow. Next week you have 2s, 5s, 7s and a 5-year TIP," said Edmonds.
"It's a lot of supply in a fairly short period of time, but I think the Treasury didn't want to bring the auction the week of Christmas or at the end of the year," Edmonds said. "I think the calendar was changed to accommodate vacations and skeleton crews that are prevalent at the end of the year."
One trader, who expects the 10-year yield to move toward 1.80 percent, said the recent move higher ahead of the auction has a lot to do with the thinning crowds and year end positioning. Yields move inversely to price.
"December's not a great month to be trading with liquidity and balance sheets and all that stuff. It is an issue and its showing," he said.