Weak Demand for 20Y Paper in Recent Auction
Following last week's successful auction, which was marked by high demand due to expectations of the Federal Reserve cutting rates, this week's sole coupon offering saw a weaker response. The auction involved a $13 billion reopening of the 19Y-11M cusip UD8, and the demand for the 20Y paper was less than anticipated.
Details of the Auction
The 20Y reopening yield stopped at a high yield of 4.039%, a decrease from 4.16% in August. Despite this being the lowest 7Y yields since July 2023, it was the only auction this month to yield above 4%. This is attributable to the infamous 20s-30s kink, which has the 30Y trading at 3.96%. The auction also tailed the When Issued 4.019% by 2.0bps, marking the largest tail since February's record 3.3bps tail. This followed six consecutive stop throughs.
Declining Demand Metrics
The demand metrics were less than impressive, with the bid to cover dropping to 2.51 from 2.54. This is the lowest it has been since February and is below the six-auction average of 2.68%.
Internal Metrics Show Decrease
The internal metrics were even less encouraging. Indirects took down 65.1%, a decrease from 71.0% last month and the lowest since the disappointing February auction. With Directs taking 16.3%, Dealers were left holding 18.6%, double last month's 9.7% and the highest since February.
Market Reaction to the Auction
Overall, this was a disappointing auction, easily the second worst 20Y sale of 2024. The market reacted accordingly, with the 10Y yield reaching session highs.
Bottom Line
The recent auction results show a significant drop in demand for 20Y paper, with metrics reflecting a weaker response than previous auctions. The market's reaction to these results raises questions about future trends and the potential impact on the economy. What are your thoughts on this development? Share your views and discuss this with your friends. Don't forget to sign up for the Daily Briefing, available every day at 6pm.
