Two Year Auction Primer

April 22nd, 2014 10:58 am | by John Jansen |

Via CRT Capital:

• 2-years have recently met solid receptions with stop-throughs at every auction since July – which stopped on-the-screws. 2s haven’t tailed since June 2013.

• Indirect awards have been increasing recently, taking an average of 23% at the last four auctions vs. 27% at the prior four. The non-dealer interest has on average taken 55% of the last four auctions, increasing vs. 50% at the prior four.  Direct bidding has declined to 26% at the last four auctions vs. 23% prior.

* Direct bidding has fallen to 24% at the last four auctions vs. 26% prior. Investment fund buying has increased to 32% at the last four auctions vs. 21% at the prior four.  In outright terms funds have taken $10.2 bn vs. $6.9 bn prior.

• Foreign-buying at 2s remains an influential factor taking 14% of the last four auctions, up slightly from 14% at the prior four, in outright terms the foreign awards were at $4.4 bn. Foreign accounts initially bought $4.6 bn of the maturing issue – bottom of the range.

• Technicals are negative with stochastics curling from overbought levels. Initial support is the recent yield peak of 40.7 bp and the 50% retracement level at 40.8 bp.  Through there is little before the high yield close at 45.8 bp and the range top of 47.3 bp.  Initial resistance is the 37.3 bp 21-day moving-average before the low yield close at 35.1 bp.

The 2-year sector has cheapened slightly on an outright basis this morning, but don’t offer any curve concession. That said, 2s haven’t tailed since last summer and there is a lot of cash to put to work in the front-end of the market given the large rollover this month. The low net new cash needs for this week’s supply – the $96 bn total in 2s, 5s, and 7s is met by $72.2 bn of maturities leaving a need of just $23.8 bn in new money – record low. As we’ve seen in recent quarters, large rollover benefits the front-end auctions the most – namely 2s and 3s.

Gene Rigo, Treasury Trader, notes that the sector has an outright concession, but is still rich on the curve.  He adds that there is not a lot of value in the issue and there’s a lack of interest in the front-end at the moment.  He’s not anticipating a particularly strong auction and sees the risk to break the recent trend with a small tail.

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