Treasury just sold  $35 billion 5-year notes. This fundraiser was $1 billion less than the previous 5-year note auction.

The bid to cover ratio, a measure of auction demand, was 2.96 bids submitted for every 1 accepted by Treasury. This is above average and the 2nd highest bid to cover ratio on record (my xls goes back to Dec.2007). The highest btc on record was 3.06 in July.

The high yield was 1.260%, which was below the 1pm "When Issued" yield of 1.269%. This is the lowest "high yield" ever recorded at a 5-year note auction. Still, demand was very healthy (as indicated by the bid to cover and the "high yield" below the level the market had priced in prior to release of the results at 1pm).

Primary dealers added $14.37 billion in 5-yr  govie coupon inventory, this adds up to 41.2% of the competitive bid, which is below the five and ten auction averages. Also of note, dealers were awarded 21.1% of what they bid on, this is below average which implies another group of buyers was more aggressive at lower yields.

Direct accounts (think bond funds like PIMCO and Vanguard) were awarded 8.7% of the issue and 26.5% of what they bid on. This is a weak takedown for directs, a growing trend and looming concern.

Indirect buyers took home 50.1% of the competitive award. This is above average and their 2nd highest auction award in the last eight 5-yr auctions with the highest award happening last month (50.8%). This brings the buyside award to 58.8%, that is healthy...again mostly thanks to indirect buyers.

Plain and Simple: In the first two auctions of the week we've seen extremely high demand at record low yields. This tells you that the bid for risk averse assets remains strong regardless of lower returns. Declining direct buyer participation should however stay on the radar of market participants. We need the overseas bid to help keep rates low.

Market Reaction

10s at session yield lows, currently +20/32 at 101-14 yielding 2.46%

Rate sheet influential MBS prices are near session highs. The November FNCL 4.0 is currently +0-06 at 102-27. Yield spreads are wider as the curve compresses. Trading flows in the TBA MBS market have picked up today.