My latest tweet (AQ_MND): $35bn 5s not so hot. Tailed 1pm by 3bps, BTC on weak side, Dealers take 58.2%. Directs and Indirects reduce tenders and bid apathetically.

That means the 5-year TSY note auction didn't go off too smoothy. This isn't a huge surprise given the speed and extent to which the issue has richened over the past 24 hours. It looks like investors were not prepared to take down this supply at current price levels and instead chose to sit on their wallets. This is evidenced by not only the weak bid to cover ratio and 3 basis point "high yield" tail vs. the 1pm "When Issued" bid, but also by a steep decline in the amount of  $$$ tendered by direct and indirect bidders.

Plain and Simple: the issue was expensive and investors were less willing to participate in the debt underwriting process because of it. Buyers were looking for larger price concessions, which they did not get today because of a continued flight to safety and ongoing shift in technical momentum. That doesn't mean demand is declining, it just means buyers were caught off-guard by the size and speed of yesterday's rally. This looks like day trading....

Market Reaction....

Benchmark yields are moving higher as dealers attempt to distribute the excess inventory they just picked up (58.2% vs. 49% average) and fast$ traders push back on the recent rally. The 2s/10s yield curve is 3bps off its flattest levels of the session at 273bps wide. The 10yr note is testing 3.46% support after touching 3.43% earlier today (on short covering).  This sounds like it would be bad for "rate sheet influential" MBS coupons but FNCL 4.5s are holding it together into the downtrade. Spreads are tightening.

If 10s fail to hold 3.46% support and and MBS coupons start playing catch-up, we may see a sizable drop in production coupon prices. Loan pricing improved by 14bps on average today so we would likely need to see the FNCL 4.5 drop below 101-12 before reprices start hitting your inbox. If this price action is being driven by day trading we should expect to see short covering in 10s near 3.46% and a directional stablization.