Suddenly it's time to worry about foreign demand for US Treasurys.
After a poor, tailing 3Y auction, and a superb 10Y auction, the third coupon auction for 2019, today's sale of $16BN in 30Y paper was downright ugly. The sale of Cusip SE9 tailed the When Issued 3.024% by 1.1bps, pricing at 3.035, the lowest since January 2018 when the 30Y was still trading below 3.00%, and a notable drop from last month's 3.16%. The tail is surprising as the auction was expected to benefit from the recent curve steepening and possible short-covering in the long-end; that did not happen.
However, it was the internals where the auction was especially ugly: the bid to cover slumped to 2.19, down from 2.31 in December, and the lowest since November, which in turn was the lowest since August 2011.
But the biggest red flag was the surprising slump in Indirect bidders, which dropped sharply from 66.3% in December to 57.3%, well below the 6 auction average of 62.6%, and the lowest Indirect/Foreign demand in over two years, or since November 2016. As Indirects tumbled, Directs bounced notably, rising to 15.9% from 11.5% last month, the highest since 2014. Finally, Dealers took down 26.7%, roughly in line with the 6 month average of 27.9%.
The ongoing drop in Indirects merely confirms what Bloomberg discussed yesterday in "Weakest Treasuries Demand Since 2008 Sends Bond-Market Warning", something we have observed in real time in every single auction we profile, and considering that the US continues to sport the lowest FX-hedge adjusted yields of the entire developed world, it is only a matter of time before the creeping foreign boycott of US paper (and funding the US deficit) becomes a major issue, and will likely require much higher yields.
For now, however, there is no imminent crisis which is why we expect that absolutely nothing will change until one day the Indirect demand plunges, Dealers are stuck with over 70% of the auction, and the next phase of the global debt crisis begins in earnest.