5Y Auction Results in Yields Reaching Session High

Overview of the 5Y Auction

Following the successful 2Y auction yesterday, the US Treasury has just sold $70 billion in 5-year notes. This resulted in a significant drop in yields by 46.8bps to 3.642%, marking the lowest level since April 2024, down from 4.110%. However, unlike the 2Y auction, the 5Y auction tailed the When Issued 3.642% by 0.3bps, making it the fourth tail in the last five auctions.

Bid to Cover and Internals

The bid to cover ratio stood at 2.41, almost the same as last month's 2.40% and slightly above the six-auction average of 2.38%. The internals showed a stronger picture, with Indirects being awarded 70.5%, the highest since March, and up from 67.25% in July. Directs took 16.3%, the lowest since May and below the recent average of 17.9%. Consequently, Dealers were left with 13.2%, down from 14.0% last quarter and also below the recent average of 15.2%.

Market Response to the Auction

While the superficial metrics might suggest a mediocre, tailing auction, a deeper look reveals stronger demand than yesterday's 2Y auction. However, the market is not known for its in-depth analysis, and as a result, yields are pushing out to session highs with 10Y rising above 3.84% for the first time today.

Bottom Line

While the 5Y auction might seem mediocre on the surface, a closer look reveals a different picture. The market's response, however, seems to focus on the superficial metrics rather than the underlying strength in demand. What are your thoughts on this? Do you think the market's response is justified? Share this article with your friends and let's get their opinion on this. You can also sign up for the Daily Briefing which is available every day at 6pm.