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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ghostfaceinvestah's picture

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

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!

LawsofPhysics's picture

My oh my, indirects are coming back.

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.

trav7777's picture

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

LawsofPhysics's picture

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

SDRII's picture

By around the world I assume you are alluding to the

Caribbean banking centers - cough cough

Yen Cross's picture

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

Greater Fool's picture

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

Dr. Engali's picture

Nothing like a negative real rate of return.

Greater Fool's picture

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

LawsofPhysics's picture

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

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.

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.

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.

wombats's picture

So when does the Treasury bubble burst?


LawsofPhysics's picture

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

SheepDog-One's picture

Like a world war breakout for example.

the rookie cynic's picture

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

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.

buzzsaw99's picture

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

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?

dbradsha's picture

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

Moric's picture

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

plocequ1's picture

He got it from Adobe. Stock symbol ADBE

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?

SheepDog-One's picture

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

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???

GOSPLAN HERO's picture
I joined the party because I was a revolutionary, not because of any ideological nonsense. -- Hermann Goering 
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.

SheepDog-One's picture

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

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!!!!

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.

Yen Cross's picture

 vHand me to the n thread.

Yen Cross's picture

 What a joke =. Pork on Ice.

Yen Cross's picture

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

Yen Cross's picture

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

Yen Cross's picture

 GMT 2 makes sense.

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...