With today's POMO schedule coming at 2pm, the brigade of Fed Prime Broker front-runners will feel dazed and confused around 1pm as they will have no idea how promptly after the auction they will be able to do their unconstitutional duty of buying Treasuries then flipping them right back to the Fed. And the last thing the long-end needs now is further uncertainty. As Morgan Stanley's Igor Cashyn demonstrates, the October 30Y auction had some of the weakest metrics in a year, and with foreign tensions escalating, if China wanted to "teach" the US a lesson, today would be the perfect time to do it (which would be contradictory to yesterday's record indirect take down of the 10 Year). Still, with the 30 Year yield surging, the dynamics of today's auction will be a major harbinger of things to come vis-a-vis demand for this orphaned sector of the yield curve.
From Igor Cashyn:
Chart of the Month – In October, the 30y auction was by far the weakest, tailing 3.2bp from its 1PM yields – the largest tail since Nov09. The underlying sponsorship statistics were weak, with a low bid-to-cover of 2.49x (vs. 2.73x in September and 2.68x 1y re-opening average) and indirect bidders taking down only 32% (vs. 36% in September and 40% 1y re-opening average). Net of the 9% taken down by direct bidders, dealers were left with 59%, which is significantly above the 1-year re-opening average of 48%.
And general commentary from Cashyn on increasingly weak auction action.
Auction demand breakdown: Foreign demand declined across the curve in October, notably led by the front-end where yields have fallen to historical lows. Of these, the 3y foreign allocation declined the most to just 11%, where before this point was a favorite among foreign investors (where foreign demand is now highest for the 10y point). Domestic demand offset some of the foreign declines in the front end, but declined somewhat for the 7y, 10y and 30y auctions.
Auction stop-outs vs. yields: The October auctions were generally weak across the curve with only the 7y auction stopping 1.5bp through its 1PM levels. Meanwhile, the 3y, 5y, 10y and 30y tailed 0.9bp, 1.3bp, 0.5bp and 3.2bp, respectively (2y was on the screws). The decline in foreign demand across the curve along with the decline in domestic demand in the back-end of the curve contributed to the weak October auctions ahead of FOMC.
Auction statistics: The broader theme for the October auction was that we saw the return of yield concessions going into the auctions, after months of yields rallying right into the auctions.
Macro auction data: Updated through October, foreign demand in Treasury auctions continues to be greatest for the 3y at 31% YTD (vs. 34% in 2009) – although it has been slipping recently, while falling off the most for the 7y to 26% YTD (vs. 37% in 2009). TIPS auction participation
remains at 14% YTD (vs. 14% in 2009).