Wednesday, February 9, 2011

Ten Year Note: Looks Good??

Bloomberg reports on today's auction of the ten year note. "In complete contrast to yesterday's 3-year auction, buyside demand was very strong for today's 10-year auction. Dealers ended up with only 28 percent of the $24 billion offering, well under January's 39 percent. The auction stopped out at 3.665 percent, five basis points below the 1:00 p.m. ET bid. Coverage of 3.23 is up from January's 2.80. Demand for Treasuries is rising following the results."

Peter Boockvar also reported on the auction at the Big Picture blog. "The benchmark 10 yr note auction was very strong as the yield of 3.665% was well below the when issued of 3.70-3.71% and the bid to cover of 3.23 was above the 12 month average of 3.12. Also, indirect bidders took 71.3% of the auction, by far the most since at least 2003 which I can’t explain and thus the dealers took only a modest amount. The Treasury definitely got some help today and it’s likely that the highest yields since May became attractive to buyers and the spread to the 2 yr at near record highs became stretched. The Treasury sells 30 yr paper tomorrow and will also be important."

And the blog Zero Hedge, Tyler Durden made these comments. "The Bid To Cover was 3.23, compared to 3.3 previously and 3.17 LTM average, so nothing special, right? Wrong. The take down is where the true story is: after Indirect interest in yesterday's 3 Year bond plunged to a multi-year low, today nothing could be further from the truth as the Indirect Take down was an all time high 71.3%, with foreign central banks taking down $17 billion of the $24 billion total. And maybe even more curious was that for the first time in over 2 years, the Direct Bidders were virtually non-existent, taking down a tiny $118K of the $24 million or about 0.5%. Compare this to the 14.9% in the last auction, and the 12.21% in the last twelve auctions, and a big red alarm should be going off. Basically, someone said "No Directs" in today's auction: the hit rate was a ridiculous 2.2%! Something major has changed in the auction dynamics and it started with yesterday's 3 Year. We wish someone smarter than us could explain to us how there is such a huge aversion to the short end by Indirects, and such a sudden love affair to the 10 Year, coupled with the complete expiration of the Direct bid."

Here is a chart of weekly pricing trends for the 7-10 year Treasury ETF (IEF) using the right side scale, with 50 and 200 day SMA's in blue and red, and the US $ index using the left side scale.