By Benjamin Streed
January 14, 2013
Treasury yields pushed lower last week despite a “mixed bag” of Treasury auctions complicating the matter. Tuesday began the week’s auctions with $32 billion of 3-yr notes that were met with an unexpectedly strong demand. The re-opening auction arrived at a yield of only 0.385% with the bid-to-cover ratio, a measure of investor demand, of 3.62x beating the previous 3.36x. For the sake of comparison, this marks the highest level of demand for shorter-term notes since October. Similar securities drew a record low yield of 0.327% back in December, so although we’ve moved up in yield it’s important to realize just how low yields remain in the face of so many economic and political uncertainties. This surprisingly high level of demand stands in stark contrast to the recent “hawkish” tones we got from the Fed as one would imagine yields to rise across the yield curve in anticipation of a stronger economic backdrop. Some pundits say that the market has a very short term memory, and sometimes it’s hard to disagree with this notion. The very next day, investors were met with the question of what to do with $21 billion of longer-dated 10-year notes and $13 billion of 30-yr “long bonds” after they had effectively bet against the Fed’s comments with the 3-yr note auction.
In what can only be described as a curious turn of events, the markets shunned the 10-yr auction while simultaneously falling in love with the 30-yr bond. The 10-yr note drew a yield of 1.863% after market participants had expected as little as 1.849% while the bid-to-cover ratio fell to a meager 2.83x. This compares to 2.95x at the last auction in December, and remains well below the 10-period moving average of 3.00x. Both indirect and direct bidders, those that include foreign central banks and institutional investors chose to stay home for this auction as each group posted significant declines in their participation rates. Indirect bidders took down only 28.5% of the deal after averaging 38.1% at the last 10 such auctions while the direct bidders fell to a measly 14.8% after averaging 43%. If the markets truly believed the Fed’s hawkish comments, then what is the rationale behind their involvement in the 30-year auction? At 3.07% it arrived at nearly 2bp lower than expectations while demand stood at 2.77x, up from the previous 2.50x. Primary dealers and direct bidder participation remained in-line, while indirect direct bidders increased their participation to 19.2% from 15.0%. Somehow, in some strange way, the market fell in love with the 3-yr and 30-yr maturities, the long and the short ends of the curve, but somehow said “no thanks” to the 10-yr maturity.
There aren’t any scheduled Treasury auctions this week, so the markets will need to look to secondary trading to get a continued reading of the temperature of the markets. Although we received some conflicting feedback after last week’s auctions, general yields are continuing their recent trend downward after starting the year higher. For example, the 10-yr note now sits at roughly 1.84%, down nearly 7bp from the start of the year, and marks a level consistent with what we saw all the way back in April of last year. Where do we go from here, and what maturities will prove to be the best barometer of where we’re headed in the New Year? Only time will tell.