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Second Consecutive Record High Bid-To-Cover Auction Closes As Treasury Sells $29 Billion In 7 Year Bonds

Tyler Durden's picture


This week's trifecta of bond issuance closes with a thud as today's $29 billion in 7 Year bonds (Cusip: QQ6) price at the second consecutive record high Bid To Cover (3.24) following yesterday's also record 5 Year Record high BTD, despite the high yield coming well lower compared to lost month's 7 Year of 2.71%, pricing at just 2.43% High Yield, the lowest since November 2010. It appears investors just can't get enough of the belly of the curve where the best risk/return profile appears to be concentrated. The Indirect take down was 39.35%, just short of the LTM average of 41.57%; Dealers were happy to step back and purchase just 39.35% of the issue, the lowest relative amount allotted to Dealers in 2011. The balance was made up by Directs, who took down 13%, or the highest since September 2010. Once again the key difference was the overall competitive bid tendered which surged from $76 billion to $94 billion, with increases across all three categories (Directs from $8.7 bn to $12.4 bn, Indirects from $12.8 to $19.2 billion, and Dealers from $54.7 to $62.3 billion) and a resultant drop in the hit rate across the board. And like yesterday, the bond came well inside the WI to the tune of almost 1.9 bps. As for the underlying reason for this bond strength, we refer readers to the must read analysis by Gleacher's Russ Certo, indicating that contrary to expectations, this bond strength is merely a confirmation of increasing economic and policy instability.

And a brief observation from Stone McCarthy on the bond results:

As we reported in a prior update today's 7-year note auction went extremely well. The auction stopped below the 1:00 P.M. bid side with a record bid/cover and a solid buyside takedown.

In fact, the total buyside (Indirect + Direct) share of the bid was 33.7% today. That was up from 28.3% last month, although still a touch below the 34.1% average of the past year. The bid was aggressive though, and the total buyside takedown was 60.6%, which was up from 47.0% last month and also above the 58.2% average of the past year.

The robust buyside demand resulted in a significant miss for Dealers. The $62.3 billion Dealer bid was up from $54.7 billion last month and it was the largest Dealer bid since February 2010, but the Dealer hit ratio was light. As a result, Dealers walked away with 39.4% of the auction. That is down from 53.0% last month and also below the 42.0% average of the past year.


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Thu, 05/26/2011 - 13:25 | 1313693 ghostfaceinvestah
ghostfaceinvestah's picture

Looming end of QE = increased bid for USTs, what a surprise (to some)

Thu, 05/26/2011 - 13:53 | 1313744 Boston
Boston's picture

I'm at a crosssroad right now.  Seems like there's short-term support at around 3.05% (10-year).

I'd like to see the yield back up to 3.3% or 3.4%, so that I can go all in again, for the ride back down to sub-3.0%.

But I'm concerned that support doesn't hold.  And the closer we get to the end of QE2, the sooner we break below 3.0%.

As much as I'd like to double dip on this trade, I'm more concerned about not missing the big ride down!

BTW, I wonder WTF Bill Gross is thinking right now, after being on the wrong side of the 10-year's collapse from 3.65 to 3.05?  Yikes!

Thu, 05/26/2011 - 13:27 | 1313699 LawsofPhysics
LawsofPhysics's picture

My oh my, indirects are coming back.

Thu, 05/26/2011 - 14:32 | 1313891 Dejean Splicer
Dejean Splicer's picture

My oh my me oh, indirects are where it's at. I hope Tyler was only shitting about his short exposure. His dullar long is working nicely.

Thu, 05/26/2011 - 13:27 | 1313701 trav7777
trav7777's picture

what a joke...record BTC for the debt issuance of a bankrupt State

Thu, 05/26/2011 - 13:32 | 1313707 LawsofPhysics
LawsofPhysics's picture

Suckers around the world born every minute.  Wait what?  infertility problem? oh no, check that.

Thu, 05/26/2011 - 13:36 | 1313717 SDRII
SDRII's picture

By around the world I assume you are alluding to the

Caribbean banking centers - cough cough

Thu, 05/26/2011 - 22:33 | 1315335 Yen Cross
Yen Cross's picture

 Alright nigga`h lets catch the bad guys/gals.?

Thu, 05/26/2011 - 13:30 | 1313708 Greater Fool
Greater Fool's picture

Looks like the meaning of "extended period" is in the process of extending.

Thu, 05/26/2011 - 13:35 | 1313719 Dr. Engali
Dr. Engali's picture

Nothing like a negative real rate of return.

Thu, 05/26/2011 - 13:37 | 1313724 Greater Fool
Greater Fool's picture

Not for the guys who bought 7Y last month 25bp cheaper.

Thu, 05/26/2011 - 13:43 | 1313748 LawsofPhysics
LawsofPhysics's picture

exactly,  plus for many, this may turn out to be much "less" negative depending on much more "extending" can be done.

Thu, 05/26/2011 - 14:06 | 1313822 Dr. Engali
Dr. Engali's picture

One month doesn't make the investment unless you are flipping the issue. But if you are a coupon clipper you are gonna get killed.

Thu, 05/26/2011 - 14:39 | 1313910 Greater Fool
Greater Fool's picture

If you're a coupon-clipper, then price fluctations on the bond itself make no difference and you should take the longest duration you can find, collecting the premium on a risk you don't care about.

Thu, 05/26/2011 - 15:20 | 1314001 Dr. Engali
Dr. Engali's picture

It kills you in the sense that you get a negative rate of return on your money due to inflation. Sure you get your principal back but it will buy a lot less in the future. Not to mention your 2% coupon is about 4% under the real rate of inflation. It's a lose lose scenario.

Thu, 05/26/2011 - 13:35 | 1313731 wombats
wombats's picture

So when does the Treasury bubble burst?


Thu, 05/26/2011 - 13:41 | 1313735 LawsofPhysics
LawsofPhysics's picture

when everyone walks away. Need to have another game in town first.

Thu, 05/26/2011 - 14:17 | 1313857 SheepDog-One
SheepDog-One's picture

Like a world war breakout for example.

Thu, 05/26/2011 - 15:00 | 1313957 the rookie cynic
the rookie cynic's picture

Or when the dollar is worth 1/100th of its present value?

Thu, 05/26/2011 - 19:54 | 1314911 AUD
AUD's picture

When the potential 'profit' is no longer outweighs the risk. There's still room at the long end. With last month's 7 Year of 2.71%, & this latest pricing at just 2.43%, seems there's 'money' to be made in bonds.

Thu, 05/26/2011 - 13:38 | 1313732 buzzsaw99
buzzsaw99's picture

Nobody wants to follow Bill Gross in the charge of the bond vigilantes. lol

Thu, 05/26/2011 - 13:42 | 1313757 SkySavage
SkySavage's picture

I can't wait to see his reaction to sub 3% yields on the 10y.

How's that short position working out Bill?

Thu, 05/26/2011 - 13:42 | 1313758 dbradsha
dbradsha's picture

Easy really - the FED is just getting overseas banks to buy on their behalf.

Thu, 05/26/2011 - 13:42 | 1313760 Moric
Moric's picture

Where does Tyler get that bid/cover graph from? and can it be gotten for before 2003?

Thu, 05/26/2011 - 13:50 | 1313782 plocequ1
plocequ1's picture

He got it from Adobe. Stock symbol ADBE

Thu, 05/26/2011 - 13:56 | 1313786 Vincent Vega
Vincent Vega's picture

So the higher the price goes (lower yield) the more people want them??? I don't get it; what am I missing?

Thu, 05/26/2011 - 14:22 | 1313865 SheepDog-One
SheepDog-One's picture

Banks now just gambling that the FED will bail their bonds out. Just a casino of drunks.

Thu, 05/26/2011 - 14:43 | 1313912 Vincent Vega
Vincent Vega's picture

Thanks SheepDog, I got it now: The Fed will auction off bonds to buy the bonds that they auction off...genius! That should work really well until......  hey, wait a minute...WTF???

Thu, 05/26/2011 - 13:54 | 1313792 GOSPLAN HERO
GOSPLAN HERO's picture
I joined the party because I was a revolutionary, not because of any ideological nonsense. -- Hermann Goering 
Thu, 05/26/2011 - 14:12 | 1313830 kito
kito's picture

not buying the argument that bond strength is actually weakness. face it, our bonds are in demand, and will be for a very long time.

Thu, 05/26/2011 - 14:23 | 1313868 SheepDog-One
SheepDog-One's picture

Right....because WE have the best printing presses around!

Thu, 05/26/2011 - 14:28 | 1313878 kito
kito's picture

tis true, and not to mention that our word to our bondholders is rock solid-to hell with the public pensioneers, bonds must be paid!!!!

Thu, 05/26/2011 - 14:41 | 1313905 What_Me_Worry
What_Me_Worry's picture

I cried uncle and sold off my TBT.  My brain just can't handle it anymore.

You win, again, Fed.

Thu, 05/26/2011 - 22:22 | 1315313 Yen Cross
Yen Cross's picture

 vHand me to the n thread.

Thu, 05/26/2011 - 22:20 | 1315316 Yen Cross
Yen Cross's picture

 What a joke =. Pork on Ice.

Thu, 05/26/2011 - 22:23 | 1315320 Yen Cross
Yen Cross's picture

  Feds r computers. Children. P..S. I'm  on your side! Deadf fish s`tyle.

Thu, 05/26/2011 - 22:28 | 1315325 Yen Cross
Yen Cross's picture

 PS dot lost. China is stealing everything. I'm fed (PISSED)

Thu, 05/26/2011 - 22:30 | 1315331 Yen Cross
Yen Cross's picture

 GMT 2 makes sense.

Fri, 05/27/2011 - 00:19 | 1315542 hamstercheese
hamstercheese's picture

Will someone please explain the nomenclature used here..what are direct bidders, what are indirect bidders, what is bid to cover ratio?  Definitions please so I can digest, thanks in advance...

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