There were two ways to read today’s 3Y auction.
As refunding got off to a start with today’s auction of a record big $54 billion in 3Y notes, an amount that is more than double the average 3Y auction in the 2015-2017 period…
… the headline results were not bad: the auction priced at a yield of 0.250%, which while the highest since June, stopped through the WI 0.253% by 0.3bps. The reason for the move higher in yields, as we explained earlier, is that traders are starting to consider the possibility of much earlier rate hikes than previously expected, whether or not that does in fact happen is a different question although amid today’s euphoria which sent 10Y yields to the edge of 1%, the reflation trade is certainly the talk of the town.
The Bid to Covver was also solid, at 2.40 it was below last month’s 2.44 and below the 6-auction average of 2.45, but certainly in the normal range of the past 12 month.
However, things get ugly when one looks at the internals, because after a solid 55.7% Indirect Takedown last month, in November foreign buyers only accounted for 38.9% of bidder participation, not only far below the recent average of 52.8, but the lowest Indirects takedown since May 2019.
And since Directs took down a “normal” 14.3%, or slightly above last month’s 12.6%, Dealers had to step in and take down a whopping 46.8%, the most since October 2018.
This sharp pullback in foreign buyers begs the question if, contrary to expectations, the higher the yield and consensus for future inflation, the less foreign demand will be amid fears of principal losses as reflation suddenly seems to be all the rage. And, if so, will the Fed be forced to expand QE again, at a time when some are already predicting a sharp spike in inflation in 2021 should covid indeed be “fixed” with Congress expected to inject another $1 trillion into the economy.
While we dont know the answer right now, we urge readers to keep an eye on the 10Y: if and when it crosses the 1% barrier, things will start moving very fast.