Apocalypse Averted: 30Y Prices With Only Modest Tail, Defying Expectations

Heading into today's 30Y auction the market was expecting nothing short of a bond market apocalypse, and the reason for that were the countless comparisons to August 2011 when the yield on the long-end rallied by 60bps, similar to what happened now... only to see the 30Y Aug 2011 auction tail by an astounding - and record 10.5%, as shown in the Nomura chart below.

So when the Treasury announced the results of today's 30Y refunding auction, the stocks bulls would have been happiest if we had a failed auction, with a record tail close second as it would - as Charlie McElligott put it, be the "turning point" in the bond rally.

Alas, it was not meant to be, and today's sale of $19 billion in 30Y paper tailed by just a tiny 1.2bps, a far cry from the Aug 2011 comp of 10.5%. Specifically, the auction stopped at 2.335%, tailing the 2.323% WI by 1.2bps. Even so, this was only the second lowest 30Y auction high yield, with only the July 2016 30Y stopping lower,. at 2.172%.

The internals were solid, with the Bid to Cover rebounding from 2.129% to 2.238, right on top of the 6 auction average. Meanwhile, Indirects took down 61.3%, well above the 50.0% allotted to Indirects in July, while Directs dropped from 16.8% to 12.5%, leaving Dealers with 26.1% of the auction, below last month's 33.2%.

So how does one explain the odd kneejerk reaction in the 30Y yield today after the auction results? Simple: the auction was nowhere near as ugly as the market expected it would be, with most bond traders expecting a gaping tail, when instead they only got 1.2bps. As a result, after a brief kneejerk move wider, the yield on the long bond quickly dipped lower, and was back to where it was at the open of equity trading today.