If this week's 2 year auction was an indication of a rising Bid to Cover, and the 5 Year yesterday showed a modest decline, the just completed 7 Year auction was evidence that any rumors of a pick up in ultimate demand in the belly and the long-end of the curve are greatly exagerated. The initial indication of how weak the auction would be came moments before the 11:30 am announcement, when the When Issued was trading at 2.094%. When the formal announcement from the Treasury came that the bond had priced at a high yield of 2.106%, or tailing by a 1.2 bps, the bond complex promptly exhaled. Things only got uglier when looking at the internals: as noted above, the Bid to Cover came at 2.36: a sharp drop from the last auction's 2.66, well below the TTM average of 2.62, and the lowest going back all the way to the 2.26 in May 2009. The takedown was just as unimpressive, with Direct interest sliding to just 16.14% of the final allocation, Indirects likewise seeing their allotment tumble from 42.30% to 34.07%, the lowest since February, which left Dealers holding half of the auction, or the most since June 2012.
In other words, demand for anything to the left of the belly is strong. But once one enters the 7 Year and onward bucket, things are starting to get shaky.
