US Auctions will be closely monitored this week!

On February 25th, the Treasury auctioned 7-year notes. It did not go well.

FED 7

This week, the US Treasury will be auctioning off the following:

  • Tuesday: 3-year notes
  • Wednesday:  10-year notes
  • Thursday:  30-year bonds

In addition, the Treasury will also be issuing a few short-term duration bills (less than 1 year).  There is also a good deal of corporate bond supply this week.  

Recall on February 25th when the Treasury auctioned 7-year notes.   It did not go well.  As a result, bond prices moved lower (on less demand) and yields moved higher (yields move inversely to bond prices):

5-Year Yields


Source: Tradingview, City Index

10-Year Yields


Source: Tradingview, City Index

Terms to know for the auction:

In addition to yields (which should be compared the previous auctions) There are several data points released after the results of the auctions are made available (usually a few minutes after 1:00pm ET).  However, there are two important ones to pay attention to in order to determine if an auction went well:

1)      Bid-to-Cover (from Investopedia): the dollar amount of bids received vs the amount of Treasury securities sold.  Bid-to-Cover ratios typically exceed 2.0.  A successful bid-to-ratio should substantially exceed the average of the 12 previous ones.  A low ratio is an indication of a poor auction. 

*The bid-to-cover from the 7-year auction on February 25h was 2.045, the lowest on record

2)      Indirect vs Direct bidders (from Investopedia): An indirect bidder, commonly a foreign entity) bids throughs another party.  A direct bidder purchases the Treasuries during the auction for themselves or their house account.   Indirect bidders are often used as a proxy for demand by foreign investors.

*In the 7-year auction on February 25th, only 38.06% of the bidders were indirect bidders.  This left direct bidders (mainly primary dealers) taking away the balance of the auction.

Market Reaction:  With the weak 7-year auction on February 25th, the markets sold bonds, sold stocks, and bought US Dollars ( as yields went higher).  Traders could expect a similar reaction this week if they auctions are poor.  Therefore, US Dollar counter currencies should move lower verse the US Dollar if results are poor.

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