3Y Auction Exceeds Expectations Despite Yield Drop to 16-Month Low

Despite the recent plummet in yields due to an unprecedented rush to safety following the yen carry trade collapse, today's market saw a rapid selling of the rates complex. This led to a rise in 10Y yields to the session's peak, just before the 3Y auction. This was the first sale of coupon paper this week, with 10Y and 30Y auctions scheduled for the following two days. Despite the intense selloff that pushed yields 10bps higher, the $58 billion 3Y paper sale saw exceptional demand.

Lowest Yield in 16 Months

The auction closed with a high yield of 3.810%, a significant drop from the previous month's 4.399% and the lowest in 16 months. The last time the yield was this low was in May 2023, when it stood at 3.695%. It also stopped through the When Issued 3.812% by 0.2bps, marking the second consecutive stop through following substantial tails in June and April.

Mediocre Bid to Cover

The bid to cover was somewhat mediocre at 2.551, down from the previous month's 2.667, and roughly on par with the six-auction average of 2.569.

Solid Internals

The internals were also solid, with Indirects accounting for 64.4%, up from 64.0% in July and the highest since May. However, this was still below the recent average of 65.0%, due to the outstanding March auction where Indirects accounted for 70.0%. With Directs allocated 20.25%, Dealers were left holding 15.35%, slightly above last month's 14.78%, but below the recent average of 16.5%.

Overall Solid Auction

Overall, this was a solid, if not spectacular, auction. Despite the day's yield increase, there was clear demand, albeit not extraordinary. Even though the auction left little to be desired, the ongoing unwind of the recent rush to safety meant that yields rose to session highs despite the solid reception.

Bottom Line

This auction paints an interesting picture of the current financial landscape. Despite the tumultuous market conditions and a significant drop in yields, there was still a strong demand for the 3Y paper. It raises the question: Are investors seeking safety in these uncertain times, or is there another factor at play? We'd love to hear your thoughts on this. Please share this article with your friends and join us for the Daily Briefing every day at 6pm.