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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: Haim R. Branisteanu who wrote (7698)2/11/2004 2:42:32 PM
From: mishedlo  Read Replies (3) of 110194
 
5-year Auction
Brian Williams

Auction went well, even after this morning's price ramp

The auction of 5-year Treasuries went well. The issue was trading at a 3.05% on a "when-issued" basis in advance of the auction. It came at a better level than that (3.03%), and the bid-to-cover ratio (a measure of bidding interest relative to the amount being auctioned) was a very good 2.84.

These good results allowed the 10-year to extend its gains, adding 1/8 of a point to the 3/4 point advance it had made today. It is rare that an auction goes this well, especially when prices had ramped so strongly into the auction. What is even more surprising was that this was done without a big increase in foreign participation. Foreign bids increased only slightly, and actually fell as a percentage of total bids.

So, we have one hurdle left in the refunding: tomorrow's 10-year auction. The rise in prices would normally make for a difficult auction, but today's action shows that is not necessarily the case. We have written over the last few months how negative sentiment has been toward Treasuries, and today's action has again sent bond bears scrambling. With the 10-year now at a yield of 4.00%, investors (especially in the mortgage community) are now wondering if the 3.93% that has served as yield support since September (and below which level we have written would have the potential to cause an enormous surge in mortgage refinancings) will hold.
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