April 24th, 2014 11:50 am
Via CRT Capital an auction preview:
7-year auctions have recently met strong receptions with all three of the most recent auctions stopping-through for an average of 0.4 bp.
• Indirect bidding has been increasing at 7s, taking 43% at the last four auctions vs. 40% at the prior four. Direct bidding has also increased over the same period, taking 24% of the last four auctions vs. 20% at the prior four.
• Investment fund buying has increased sharply to 41% of the last four auctions vs. 36% of the prior four. In outright terms, that is $12.0 bn vs. $10.4 bn prior.
• Foreign investors as a % of the auction have increased recently, taking 15% of the last four auctions vs. 14% at the prior four. In outright terms, that’s $4.5 bn over the last four auctions vs. $4.2 bn during the prior four.
• Technicals are bearish and stochastics continue to favor of higher yields. Initial resistance will be the week’s yield low of 2.252% and then the 21-day moving-average of 2.240%. Break that and we look to a volume bulge at 2.18%. Initial support comes in at the high yield-close at 2.299% and then the recent range-top of 2.323% before the Bollinger top at 2.37%.
We’re inclined to play the averages and note that this benchmark has a strong tendency to tail when 2s and 5s tail do beforehand (73% of occurrences since the 7-year was reintroduced in Feb ‘09). The most relevant risk is an outsized Direct award – although this bidding group has been tame this week, unlike March’s strong bank-inspired demand. Volumes have been average in the sector at 101% of norms for an auction day, but with a weak marketshare at 11% vs. 13% average.
Wood Jay, Treasury Dealership Trader, notes that the issue is cheap, similar to the 5-year yesterday and so the tail at that auction might prove telling. He adds that we’d need to price-in more of a concession from here for a tight auction and otherwise at current levels he’s expect a lackluster takedown.