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.