Five Year Auction

January 29th, 2015 10:33 am | by John Jansen |

Via CRT Capital:

We are apprehensive about this morning’s 5-year auction as the sector has recently pushed toward the yield lows and is only offering a modest outright concession. Moreover, with the WI suggesting the lowest yield for a new 5-year since May ’13 we’re cognizant that could prove a disincentive to bid aggressively. The FOMC meeting triggered a solid bid on Wednesday and we’re expecting that a more significant accommodation will be required to takedown the new issue.  Recent history illustrates that 5s tend to tail, doing so at seven of the last nine auctions and while the average stop-through is larger (1.3 bp) than the average tail (0.8 bp), the frequency of tails overwhelms.  On the other hand, foreign demand has been strong for Treasuries as an asset class vs. lower-yielding European sovereigns and the liquidity provided by the auction could prove enticing – note that foreigners tend to buy roughly 17% of the 5-year auction. Issuing 5s and 7s on the same day muddies the data a bit, but volumes are strong for an auction day at 111% of the norm.

* 5s have recently seen weak receptions with seven of the last nine auctions tailing for an average of 0.8 bp vs. two stopping-throughs averaging 1.3 bp.

* Foreign buying has ticked higher recently, taking 17% at the last four auctions vs. 16% of the prior.  Foreigners bought $14.6 bn of the maturing issue – middle-of-the-range for rollover potential.

* Non-dealer bidding has been steady at 5-year auctions recently, taking 64.6% at the last four auctions vs. 65.1% at the prior four.  Investment Fund buying has increased, taking 43% of the last four auctions vs. 39% at the prior four.  On an outright basis, fund buying has taken $15.2 bn vs. $13.8 bn prior.

* Technicals are mixed with momentum in the middle of the range with both fast and slow stochastics at 49.  We’re looking to the recent range as the most relevant trading parameters and see initial resistance at the FOMC-day low yield-print of 1.223% and then the Jan low yield-close of 1.157% with the range bottom at 1.150% immediately beyond there.  For support we have a modest volume bulge near 1.31% before this week’s range top at 1.362% and also note the downward-sloping trendline at 1.380% before the 21-day moving-average at 1.40%.

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