After yesterday’s mediocre 3Y auction, today’s reopening of $21 billion in 10Y notes (the 9-Year 10-Month cusip 3W8) was especially ugly. On one hand, the auction stopped out at 2.795%, tailing the When Issued by 0.5bps, if modestly lower than last month’s 2.889%, the highest since 2014, and the first stop lower than the previous auction since November.
However it was the internals that were especially ugly. While the Bid to Cover dropped from 2.50 to 2.46, below the 2.49 six auction average, what was surprising was the sharp drop in foreign, “Indirect” bidders, which slumped to just 53.2% of the final award, down sharply from 66.2% in March and 66.6% six month average. This was the lowest Indirect award going back to January 2015. And with Direct bidders taking down 8.4%, above the 6.5% last month and the highest since December, it meant that just like in yesterday’s 3Y auction, Primary Dealers were stuck holding much of the bag, with an award of 38.4%, the highest since September 2017.
In summary, together with yesterday’s mediocre 3Y auction, the week is not starting off well for the torrential supply of US Treasury paper, which is rather strange as there should be significant demand for safe paper on a day like today when speculation about World War III is rampant. If the last two auctions are any indication, funding the US $1 trillion deficit may prove to be far more difficult than many speculate, unless of course, the Fed does not step in and resume monetizing the debt via QE4.
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