There is just one way to describe the first coupon auction of 2019: terrible.
With the 10Y When Issued trading at 2.555% at 1pm, many were wondering if after 9 consecutive tailing 3Y auction we would see number 10. The answer was a resounding yes, when the Treasury announced that today’s sale of $38 billion stopped at a yield of 2.559%, the 10th consecutive tail for this tenor since March 2018, if also the lowest yield since April 2018 and well below December’s 2.745% thanks to Powell’s recent dovish relent.
The internals of the auction were just as abysmal: the bid to cover of 2.44 was below December’s 2.59 and below the 6 auction average of 2.59. It was also the lowest Bid to Cover since April 2009. Meanwhile, confirming growing fears that offshore institutions are souring on US paper, today’s Indirect takedown was just 41.9%, the lowest since February 2016, and far below the 6 auction average of 46.0%. And with Directs taking down 17.7%, or the most since December 2015, it left Dealers holding 40.4% of the final allotment.
So with dreadful metrics in virtually every aspect, today’s upsized sale of 3Y paper proved to be an inauspicious start for the US Treasury market, where yields may need to reprice well higher for them to prove attractive to foreign investors, and yet for that to happen investors may have no choice but to “rotate” to equities, something which despite the recent bear market rally, they don’t appear to be willing to do just yet. Which also means that the Fed may have no choice but to step in with yet another bond monetization episode in a year when the US is expected to issue approximately $1.4 trillion in new net debt.
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