Indirects Flee From Poor 7 Year Auction Which Pushes Bond Curve Wider
Today's final auction of the week just closed in the form of a $29 billion 7 year bond issue (Cusip: QG8). While we will find out whether or not this is the auction that broke the debt ceiling camel's back when everything settles on Tuesday of next week, the internals were downright ugly: the WI of the bond was trading at 2.68% when the auction priced at 2.712%, a surprisingly wide tail into what everyone claims is a risk free asset. As a result the entire curve has been dragged wider on the news. Among the internals, the Bid To Cover came at 2.63, far weaker than both the previous (2.80) and the average (2.79). But the most notable metric as usual was the Indirect Bid, which traditionally strong at the belly of the curve, saw only 39.1% of the auction going to foreign bidders. This compares to 49.31% in the last auction and 51.45% on average. This meant that Primary Dealers, better known as Brian Sack, were forced to preemptively monetize 53% of the auction, and 7.8% going to Directs. Overall a very poor auction, considering that conventional wisdom was that when the Fed launches QE3 it will focus on bonds at the belly and to the right, in order to moderate inflation. Hopefully (for some) this is not a harbinger that the Bill Gross thesis is finally starting to materialize.
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