Treasury hs successfully auctioned $35 bn 5 year notes (Full Results). 

Demand was strong, and the high yield was a bit lower than when-issued yields at 1pm, but the most refreshing observation we take away from this auction is the notable uptick of indirect bidder participation. After their dismal turnout at the 2 year note auction yesterday, this alleviates fears that overseas investors may be looking for a larger inflation premium in U.S. debt yields to compensate for currency appreciation and inflation in their own country (at least further out the yield curve). Indirect bidders took home 45% of the competitive bid. This is above average and much improved from the previous four 5-year note auctions.

Dealers who seemed to be bidding more aggressively on this issue had a small award vs. an obvious increase in the offers they tendered (low hit rate). This is a positive as we do not want dealers adding more inventory than  expected nor do we want them in control of the majority of the new issue. Direct bidders we close to average on all metrics. The bid to cover ratio was an above average 2.97 bids submitted for every 1 accepted by Treasury. The High Yield was 1.7bps below the 1pm When Issued yield (WI is basically the market's forward pricing mechanism for new issue Treasury securities). This is a sign of strong demand.

As expected, we're seeing a muted market reaction given the strength of the auction.  In fact, in any other context without an impending FOMC announcement, it would be quite troubling to see the 10yr chart below, where yields returned to their previous trend after an initial rally...

And here's a snapshot of the broader markets, including a chart of FNCL 4.5's

There's one word that captures both the analysis about this auction and speaks to the impending FOMC news at the same time...

NEXT!!!

That's really about the size of it...  The auction wasn't the headliner for today.  It's the Fed.  So an average or better than expected auction isn't going to do much to move markets until near future unknowns become known.  The risk of a poor auction was a hurdle that could have tripped us up and caused even more of a back-up before 2:15pm, but we're over it and moving on. 

Once FOMC is digested, depending on how much it affects markets, the nominal influence of a strong 5yr auction will be mixed back in to trading.  The chef must know the flavor and potency of the key ingredient before adjusting the amount of the supporting players.  If FOMC is bland, I think these auction results are certainly a net-positive for bond bulls.