The US treasury will complete the coupon auctions for the week with the sale of $22 billion 30 year bonds (well 29 year and 11 month bonds).
The sale will provide another key test for duration demand, following the strong reception to yesterday’s 10-year auction.
However, according to BMO, historically the 30-year auctions have tailed nearly 80% of the time when the preceding 10-year auction stopped through by at least one basis point. Yesterday's stop through was -1.7 basis points.
That said, today's setup suggests a favorable outcome is possible. Key factors include according to BMO:
- Yield Levels: With 30-year yields climbing above 4.50% this morning and the 5s/30s curve steepening to post-election highs, the value proposition has improved.
- Pre-Auction Concession: Both relative and outright valuations have been enhanced, bolstering the case for demand.
- Low Volatility: Treasury volatility has returned to its lowest levels since the start of the policy cycle, likely encouraging stronger bidding conviction.
These elements point to a potential stop-through.
The auction's success or failure will be dependent upon the results in relation to the six-month averages of the major components
- Tail 0.2 basis points
- Bid to cover 2.44X
- Directs (a measure of domestic demand) 17.8%.
- Indirects (a measure of international demand) 67.7%.
- Dealers 14.5%
This article was written by Greg Michalowski at
www.forexlive.com.
