The US treasury auctioned off 3 and 10 year notes yesterday with tepid demand. International investors were to blame. Perhaps they were concerned about the value of the dollar which was weakening.
Today, the dollar is back on the upward path and interest rates are also higher with the 30 year up about 3 basis points at 3.542%.
Admittedly the big rise in rates is in the shorter end with the 2 year up 18.6 basis points at 3.76%. That makes the auction a key barometer for the longer end. Is 3.542% or thereabouts, a good enough return given inflation is still high, and the expectations that the Fed is likely looking toward over 4% as a terminal rate and have promised to keep rates high for an extended period of time after that to whip inflation?
The six-month component averages for the 30 year auction shows:
- Bid to cover 2.37X. The bid to cover is a measure of how many bids were received to cover the $18 billion auction amount
- Dealers, 12.8%. The dealers typically take the balance of the auction after the domestic and international bids are filled
- Directs a measure of domestic demand 17.3%
- Indirects a measure of international demand 69.9%
- Tail to the WI level at the time of the auction -0.7 basis points. At the time of the auction the when issued yield (or WI yield) is noted and compared to the high yield that the auction is sold. A tail of -0.7 basis points means that the high yield was -0.7 basis points below the WI yield. That is indicative of strong investor demand. Conversely, a tail that is positive is indicative of less investor demand.
Traders will measure the success or failure of the auction against the 6 month averages.
Both the 3 and 10 year auctions yesterday had positive tails. The Bid to cover was less than the averages. The indirect % was much less than the 6 month average.