08-03-2021 18:18:00
This week, the US Treasury will be auctioning off the following:
- Tuesday: 3-year notes
- Wednesday: 10-year notes
- Thursday: 30-year bonds
In addition, the Treasury will also be issuing a few short-term duration bills (less than 1 year). There is also a good deal of corporate bond supply this week.
Recall on February 25th when the Treasury auctioned 7-year notes. It did not go well. As a result, bond prices moved lower (on less demand) and yields moved higher (yields move inversely to bond prices):
5-Year Yields
Source: Tradingview, FOREX.com
10-Year Yields
Source: Tradingview, FOREX.com
Terms to know for the auction:
In addition to yields (which should be compared the previous auctions) There are several data points released after the results of the auctions are made available (usually a few minutes after 1:00pm ET). However, there are two important ones to pay attention to in order to determine if an auction went well:
1) Bid-to-Cover (from Investopedia): the dollar amount of bids received vs the amount of Treasury securities sold. Bid-to-Cover ratios typically exceed 2.0. A successful bid-to-ratio should substantially exceed the average of the 12 previous ones. A low ratio is an indication of a poor auction.
*The bid-to-cover from the 7-year auction on February 25h was 2.045, the lowest on record
2) Indirect vs Direct bidders (from Investopedia): An indirect bidder, commonly a foreign entity) bids throughs another party. A direct bidder purchases the Treasuries during the auction for themselves or their house account. Indirect bidders are often used as a proxy for demand by foreign investors.
*In the 7-year auction on February 25th, only 38.06% of the bidders were indirect bidders. This left direct bidders (mainly primary dealers) taking away the balance of the auction.
Market Reaction: With the weak 7-year auction on February 25th, the markets sold bonds, sold stocks, and bought US Dollars ( as yields went higher). Traders could expect a similar reaction this week if they auctions are poor. Therefore, US Dollar counter currencies should move lower verse the US Dollar if results are poor.
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