Foreign Demand for Tailing 10Y Auction Nears Record

Substandard Sale of 10Y Paper

Following a disappointing 3Y auction, which saw a significant drop in foreign demand due to the recent yield spike and wavering faith in the Federal Reserve's easing plans, the Treasury has sold $39BN in 10Y paper. This sale, which came in the form of reopening of 9Y-10M cusip LF6, was at best subpar.

High Yield and Bid to Cover

The auction stopped at a high yield of 4.066%, a sharp increase from last month's 3.648% (the lowest since May 2023). It tailed the When Issued 4.062% by 0.4bps, a significant reversal from last month's 1.4bps through auction (though not as bad as the 3.1bps tail in August). The bid to cover was below average, dropping to 2.481 from 2.637 in September, and also fell short of the 6-auction average of 2.50.

Foreign Demand and Internals

Interestingly, the internals were not as disappointing, possibly because foreign central banks are looking to stock up on US paper now that yields are back over 4%. The Indirect takedown rose to 77.6% from 76.1%, just below the all-time high reached in February 2023 when indirects took down just under 80%. With Dealers awarded 13.9%, Directs held only 8.4% of the auction, the lowest since November 2018.

Curious Auction and Market Response

This auction was peculiar, seeing near-record foreign demand, yet the metrics were at best subpar. This might explain why yields were unchanged after the result, even after rising to a session high of 4.07% just before the auction. Meanwhile, stocks continue to reach new all-time highs, seemingly oblivious to the latest surge in yields.

Bottom Line

This auction presents a curious scenario with near-record foreign demand yet subpar metrics. It raises questions about the current state of the market and the future of yield rates. What are your thoughts on this situation? Feel free to share this article with your friends and discuss. Don't forget to sign up for the Daily Briefing, delivered every day at 6pm.