Solid 3Y Auction Prices At Lowest Yield Since Nov 2016

With bond yields tumbling in recent weeks as a result of the fears the Chinese coronavirus epidemic will cripple global growth for at least the first quarter, moments ago we got the first coupon auction since the full extent of the Chinese viral pandemic emerged, and it was quite impressive.

At a quick glance, today’s sale of $38BN in 3Y paper may have lagged expectations, tailing the 1.392% When Issued by 0.2bps, and stopping 1.394%. However, when one considers the dramatic tightening in yields and the fact that today’s stopping yield was the lowest since November 2016, and one can forgive the modest tail.

The internals, however, were quite sold with the bid to cover rebounding from January’s 2.45 to 2.56, and well above the six-auction average of 2.48. The demand breakdown was also strong, with Indirects taking down 43.9%, a bit below the 48.1% six auction average and last month’s 47.5%, and with Directs taking down 18.1%, above the 16.7% last month, Dealers we left with 38.0%, the most since May 2019, potentially in anticipation of upcoming expansion to the Fed’s QE4 which will likely include 2 and/or 3Y coupons.

Overall, this was a solid auction, whose coupon – the lowest since late 2016 – showed just how greatly the “reflation” narrative that triumphantly dominated the airwaves at the start of the year has been shattered.