Record Foreign Demand Doesn't Prevent Sloppy 5 Year Auction Tails
The Treasury recently sold its second coupon offering for the day, a $70 billion 5-year paper, in an auction that was less than stellar. This sale followed a disappointing 2-year auction earlier in the day.
High Yield and Auction Details
The high yield for the 5-year paper was 4.138%, a significant increase from 3.519% in October and the highest since June. The 5-year paper was trading at 4.122% at 1pm, which resulted in a 1.6bps tail. This marks the fourth consecutive auction that has failed to stop through, and the second largest tail of 2024. The only tail larger was in January, which was 2bps.
The bid to cover ratio was 2.39, virtually unchanged from the 2.38 last month, and the lowest since June.
Internals and Foreign Bidders
The only positive aspect of the auction was the internals. Indirect bidders took down 76.4%, an increase from 70.3% and the highest on record. Despite this record number of indirect bidders, direct buyers were left with only 9.5% of the auction, the lowest since December 2018. Dealers were left holding 14.2%, slightly below the 6 auction average of 14.4%.
Bottom Line
This auction was unusual. Despite the record number of foreign bidders, the pricing into the auction was less than ideal. This contributed to pushing the 10-year yield back to just under 4.30%, a level at which stocks will likely start to feel the pressure of rapidly tightening financial conditions.
What are your thoughts on this auction and the current state of financial conditions? Share this article with your friends and discuss. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.
