7Y Auction Falls Short as Direct Bidders Hit Lowest Since March 2020

Subpar 7Y Auction

In the final coupon auction of the week, the US Treasury sold $44 billion in 7-year paper. However, the auction was, at best, below average. The high yield stopped at 3.770%, marking the lowest yield on the tenor since April 2023. This was a significant 39bps tighter than the previous month's 7Y auction. More significantly, the auction trailed the When Issued 3.761% by 0.9bps, marking the first tail since May.

Decrease in Bid to Cover

The bid to cover also saw a decline from the July auction, falling to 2.50% from 2.637% last month. This is below the six-auction average of 2.55%.

Impressive Internals, Direct Takedown Tumbles

The internals were more impressive, with Indirects taking down 75.1%, above last month's 74.4%, and also above the recent average of 69.22%. However, while Indirects rose, the Direct takedown plummeted to just 11.2% from 16.8% last month, hitting the lowest since March 2020. Consequently, Dealers were left with 13.7%, up from 8.9% last month and in line with the recent average of 13.4%.

Overall Performance and Market Reaction

Overall, this auction was subpar, and the weakest of this week's coupon trio. Despite this, with yields already snapping higher after today's stronger than expected GDP and initial claims data, there was little movement in the secondary market. The 10Y barely budged on news of the auction's pricing, with the benchmark paper trading at 3.87% since this morning.

Bottom Line

This week's final coupon auction by the US Treasury was less than impressive, with the 7Y auction falling short of expectations and Direct Bidders hitting their lowest since March 2020. Despite the weaker auction and stronger than expected GDP and initial claims data, the secondary market remained relatively stable. This raises questions about the state of the economy and the future of auctions. What are your thoughts on this development? Do share this article with your friends and let them know about these market movements. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.