Unexpectedly Grim 3Y Auction Sees Drop in Foreign Demand as Buyers Withdraw

Unanticipated Results Following the Fed's Rate Cut

Contrary to expectations, the first coupon auction following the Federal Reserve's rate cut did not go smoothly. The Treasury recently sold $58 billion in 3-year paper, equalling the record high issuance for this tenor. However, the auction results were surprisingly poor. The sale stopped at a high yield of 3.878%, the highest since July, and tailed the When Issued 3.871% by 0.7 basis points. This marked the first and largest tail since June, and followed the biggest stop through since August 2023.

Decline in Bid to Cover Ratio

The Bid to Cover ratio dipped to 2.452 from 2.662, marking the lowest since June and significantly below the six-auction average of 2.574.

Unpleasant Internal Figures

The internal figures were particularly distressing, with Indirects plummeting from a record high of 78.2 last month to a mere 56.9, the lowest of 2024. Interestingly, Direct bidders took down 24.0, the highest in a decade, leaving Dealers to hold 19.2% of the final allocation, the highest since June.

Overall Unfavorable Auction

Overall, this was a very unfavorable auction. Given the sharp increase in yields in recent weeks, now that the market no longer anticipates the Fed to aggressively cut rates in the coming months, this was somewhat predictable.

Looking Ahead

The more significant question is when a more prolonged selloff across the curve will occur. Such a selloff, with trillions of debt issuance on the horizon, would compel the Fed to swiftly intervene with promises of more lenient monetary policy.

Bottom Line

This unexpectedly grim 3Y auction raises several questions about the future of the market and the potential actions of the Federal Reserve. What are your thoughts on this development? Do you think the market will experience a more sustained selloff? Share your thoughts and this article with your friends. Don't forget to sign up for the Daily Briefing, available every day at 6pm.