So…. If today’s 10yr auction occurred during a more stable time in economic history, or if yields were higher heading into it, perhaps we could reconcile calling it somewhat weak. But just as we paused to consider yesterday, let us again pause to consider 2 things:
1. Today’s auction cycle does not benefit from any old 10yr debt maturing and being returned to investor’s pockets for potential reinvestment. This is normally BILLIONS of dollars.
2. How to say this… Yields are just pretty damn low! A 10yr auction just stopped at a high yield of 2.0 pct folks… Go back in time a month and say that and see if anyone believes you.
The fact is that Treasury auctions are and were facing a very tough road ahead this week. Today’s bid-to-cover at 3.03 is actually higher than the average of the last 4 reopenings. The when-issued market was a scant 1 basis point lower at 1pm than the auction result.
This is all telling us that the 10yr note is very much “where it wants to be.” Don’t take that to mean it wants to be “exactly at 2.0%, but this phenomenon of “low 2’s and sometimes high 1’s” is more than just a short term phenomenon, at least as long as we continue to experience dual concerns at home and abroad.
As is commonly the case, MBS pitched and rolled fairly violently following the auction but are currently no worse than they were heading into the thing:
-Fannie 4.0’s down 4 ticks on the day at 104-07
-Fannie 3.5’s down 7 ticks on the day at 101-09
A panicky lock desk might reprice for the worse simply on the volatile moves, but it’s not justified just yet and won’t happen en masse unless MBS weaken a few more ticks.