Seven Year Note Auction

November 26th, 2014 9:08 am | by John Jansen |

Via CRT Capital:

We are cautiously optimistic about the prospects for this afternoon’s 7-year supply.  The absence of any meaningful concession is a bit troubling; however the broader flight-to-quality that has been supporting Treasuries should stoke demand for the new issue.  The early schedule might limit the set-up, as could the winter-storm and unofficial early close, however the experience of yesterday’s 5-year auction suggests that overseas demand is meaningful at these levels. That said, it will likely come down to indirect interest, as yesterday’s 5-year didn’t benefit from any outsized direct interest, so we don’t think it’s likely banks show up today (7s have historically not been an issue they favor).  If the auction tails, we suspect it will be more a function of the holiday and weather than a vote of no-confidence for the 7-year sector or Treasury market more broadly and as a result do little to reverse this morning’s bullish price action.

* 7-year auctions have recently met weak receptions with five of the last six offerings tailing an average of 1.1 bp vs. a prior string of four stop-throughs averaging 0.4 bp and August’s 0.1 bp through.

* Indirect bidding has been increasing at 7s, taking 48% at the last four auctions vs. 43% at the prior four.  Direct bidding has decreased over the same period, taking 15% of the last four auctions vs. 23% at the prior four.

* Investment fund buying has increased to 44% of the last four auctions vs. 41% of the prior four.  In outright terms, that is $12.7 bn vs. $11.9 bn prior.

* Foreign investors as a % of the auction have decreased recently, taking 16% of the last four auctions vs. 17% at the prior four.  In outright terms, that’s $4.6 bn over the last four auctions vs. $4.9 bn during the prior four.

* Technicals are bullish as stochastics continue to favor lower yields. Initial resistance will be the 38.2% retracement at 1.882% and then a series of recent closes near 1.85%. Break that and we’ll look the 50% retracement at 1.812%. Initial support is the 40-day moving-average at 2.002% before the high yield-close at 2.089%.

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