Expensive 10-Year Auction Draws Apathetic Demand. MBS Near Highs


Treasury just sold $21 billion reopened 10-year notes. Demand could be described as “apathetic” as investors seemed to scoff at higher prices/lower yields. A pre-auction rally both yesterday and in the moments leading up to the 1pm bid cut-off are largely to blame for the lack of a concession. 

Disinterested demand isn’t obvious in the bid to cover as it was close to recent averages, it is however apparent in the breakdown of bidding interest….

Direct buyers were awarded 5.9% of the competitive bid and a measly 14.6% of what they bid on while indirect accounts took home a way below average 42.4% of the issue vs. their five auction average of 56%. This left dealers to unwillingly absorb excess inventory. The street bought 51.7%  of the issue vs. their five auction average of 37%. This is the largest dealer take down since February of last year. Also reflecting apathetic demand was the high yield, which came in 1.1bp higher than the 1pm “When Issued Yield”. 

Plain and Simple: Buyers didn’t have a chance to build an auction concession before 1pm bid cutoff, so they baked one in during the auction process itself by only offering to buy at lower prices/higher yields. Sloppiness was a function of the issue being too expensive.

Here is a look at our spreadsheet….

Market Reaction…

There was a modest knee jerk reaction in the wrong direction when the results flashed but that also coincided with the release of loan servicer sanctions by regulators. The key takeaway from that news is no penalties are being imposed on the banks at this time, although servicers have agreed to compensate borrowers who were wrongly foreclosed upon…that will cost some $$$.  Penalties TBD though…

At the moment benchmark 10s are near their price highs/yield lows of the session as are “rate sheet influential” MBS coupons. In our model, loan pricing is 12.3 bps on average among the five major lenders…from that perspective, with the FNCL 4.5 now +2/32 at 101-14…reprices for the better are possible if you haven’t already seen one.  We’ve got current coupon yield spreads off intraday wides as the rates rally tries to extend itself toward 3.40-3.42% resistance. 


NEXT EVENT: Obama on the budget and Beige Book

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