7 Year Auction Preview

May 29th, 2014 11:42 am | by John Jansen |

Via CRT Capital:

CRT’s 7-year Auction Outlook                                                                                                                                    • 7-year auctions have seen strong receptions at recent auctions stopping through an average of 0.38 bp after consistently tailing or stopping on-the-screws during the prior six auctions.

• Foreign activity has helped. Foreign investors took on average 17.5% in the last four auctions versus 14% in the prior five.

• Investment Fund buying has also picked up sharply in recent auctions – taking 43% of the last four auctions vs. 36% of the prior four. In outright terms, that is $12.6 bn vs. $10.5 bn prior.

• Depository Institutions have been spotty.  In the March auction they bought about $4.6 bn but unlike with 5s, these buyers did not return in April.

• Indirect bidding has been increasing taking 45% at the last four auctions vs. 40% at the prior four. Indirect bidding had there strongest performance in the past 26 months at April’s auction taking nearly 50% of total supply.

• Direct bidding has also increased over the same period, taking 24% of the last four auctions vs. 19% at the prior four. Despite that there was a weak showing in direct bidding during last month’s auction – where they took down only 19% of total issuance. One could point to the lack of performance by Depository Institutions during that auction as one of the main culprits.

• Dealer buying has also slipped in recent auctions. After reaching a 12-month high of 49.8% at last November’s auction, the amount taken by this group has steadily fallen hitting as low as 26% in March and taking 31% during last month’s auction. Dealers are short the belly –see the graph at the end of the write up comparing the performance of 7-yr yields versus Primary Dealer holdings in the belly.

• Technicals are very extended in terms of momentum measures and 7s have reached the measured moves of a variety of heretofore bullish patterns.

• Woody Jay, Treasury Dealership Trader, notes that though he likes the market he is neutral on the auction. After two tails in 2s and 5s earlier this week, he sees little to suggest that today’s auction will stray from that pattern. He adds that we have seen good buying in 5s so far this morning as well as new contract highs, and does not expect prices break lower anytime soon.

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