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We Could See A Bond Market ‘Coup’ During Today’s Treasury Auction
Heads up – the U.S. Treasury is auctioning off $ 13 billion in 30-year bonds this afternoon, and it could get interesting.
This week, other government auctions for shorter-dated Treasuries finished with a very small “tail.”
(The “tail” is the difference between the highest yield on the Treasuries during the auction and the yield when the auction first gets started (the “when-issued” level). Thus, the appearance of a “tail” typically represents weak demand).
There was also a high level of “direct” bidders at those auctions – investors bypassing Wall Street dealers and buying directly from the Treasury.
Nomura analysts suggest this is part of a larger shift in the bond market taking place (via Reuters):
The Treasury sold $ 32 billion of three-year notes on Tuesday at a high yield of 0.385 percent, just about where the market had expected.
The high direct takedown in this and the previous three-year auction could signal “a shift in investor bidding patterns at auctions, where buyers bypass dealers and go straight to the Treasury, while still able to clear the auction near the WI (when issued) levels,” wrote Nomura analysts after the sale.
Yesterday’s auction of 10-year Treasury bonds was weak and resulted in another tail.
The patterns we’re seeing in these auctions this week suggest to Russ Certo, Head of Rates at Brean Capital, that we could be setting up for something of a “coup” at today’s Treasury auction of 30-year bonds – and the big banks are the ones being unseated.
Certo wrote in an email this morning: “The bond market is lower overnight as the weak ten-year auction yesterday resonates in traders’ minds, ‘if we couldn’t take 10yrs down without a tail, how can we take 30yrs down?’”
His answer is similar to Nomura’s: the direct bidders bypassing Wall Street at Treasury auctions.
Here is more from Certo’s email:
I also, conversely, think that there has been a tendency for some real money accounts to either bypass the Street in the direct bidding process or at 11th hour with bids that can change the dynamic of the auction process, sometimes even effecting an auction stop through 1pm levels – surprising the Street, set up short, which then scrambles to get paper back at HIGHER PRICES. The worse a 10-year auction, or 3yr and 10yr process, the more likely negative sentiment reigns and the third and last leg of auction supply is vulnerable to a coup. I think this is a reasonable outcome for today and just simply feel there is asymmetry in outcome.
30-year Treasuries hit their lows of the day around 10 AM this morning after the overnight selloff referenced above, and have since started to reverse. We’ll have to wait a few more hours to see how the auction turns out.