The Treasury has successfully auctioned $40 billion 5-year notes. This was $2 billion less than the previous six 5-year note auctions. 

The bid to cover ratio, a measure of auction demand, was 2.71 bids submitted for every one accepted by the Treasury.  This is above the ten auction average of 2.34 and the five auction average of 2.69.

Bidding stopped out at a high yield of 2.13%. This was about half of one basis point above the 1pm "when issued" bid.  A sign that the market felt yields were too low...regardless of the 11bp rise seen in the OTR 5yr note yield this morning.

Primary Dealers, aka the street, took 44.4% of the issue.  This is above the ten auction average of 40.1% of the total auction award and the five auction average of 43.1%. The fact that dealers took down more inventory and their hit rate was high implies demand from another bidder was below average...this partially explains why the high yield was above the 1pm "when issued" yield

Direct bidders, aka domestic fund managers like Vanguard and PIMCO, were awarded  15.0% of the issue. This is another record turnout from direct buyers. 

Indirect bidders were awarded a 40.6% of the auction. This below the five and ten auction averages of 45.2% and 43.6% respectively. 

Plain and Simple: Dealers took down a bit more inventory than was expected to offset passive demand from indirect bidders. Fortunately direct buyers continue to be big supporters of the 5yr maturity which helped keep the majority of auction supply in non-dealer hands. The street was a bit late with its auction concession thanks to ongoing volatility in stocks and the corresponding flight to safety...another reason for somewhat sloppy auction demand. All things considered this was an average auction. Not good, not bad.

The reaction in markets...

S&Ps are just off their high print of the day, currently +1.19% at 1086. 1090 has held further positive progress in check.

Benchmark 10s have broken 3.21% yield support and are now testing  the 3.25% pivot. The 3.50% coupon bearing 10 year Treasury note is -0-25 at 102-03 yielding 3.252%...yields are 9.3bps higher today.

The rate sheet influential MBS coupon price range continued its consolidation into and after the auction results. The FN 4.0 is -0-09 at 99-14. The FN 4.5 is -0-06 at 102-05. The secondary market current coupon yield is +4.5bps at 4.09%. Yield spreads are off their tightest levels of the day after modest originator selling was seen late morning.

Our fate rests mostly in the stock lever. If the S&P breaks 1090 and 10s push through 3.25% support...reprices for the worse are likely. Some smaller regional lenders may already have recalls in process so be careful if you are floating. You know our long term stance...we have aggressively favored locking since last Thursday afternoon as it became painfully obvious that a lack of liquidity in the 4.0 TBA MBS market has made securitizing 4.5 and 5.0 MBS a lender's best execution option (depending on whether or not you retain servicing).