The Treasury just auctioned $38 billion 2-year notes. This auction amount is $2 billion less than the previous auction, $4 billion less than the May auction, and $6 billion less than the record $44 billion auction in April.

The bid to cover ratio, a measure of auction demand,  was 3.33 bids submitted for every one accepted by Treasury. This is above average but lower than the 2-year note auction in June.

88% of the issue was taken down at a high yield of 0.665%. While this is a new record low for the "high yield" at a 2-year note auction, it was still almost 1 basis point higher than the 1pm "When Issued" yield. Indicating buyside demand was lacking.

Both direct and indirect bidders were awarded below average takedown percentages. Directs took 13.5% of the issue, below both the five and ten auction averages. Indirect bidders were awarded 32.8% of the auction, again below both the five and ten auction averages. 

Direct bidders were much less aggressive, getting only 30.1% of what they bid on (hit rate). Indirects were willing buyers, but only at higher yields. Treasury awarded these accounts 66.2% of what they bid on.

This left primary dealers to mop up the mess. The street added $20.1 billion in 2-year maturity debt, this represents 53.7% of the total auction and 22.2% of what they bid on. Both metrics are above average for primary dealers. I'm not sure if the street was short this spot on the curve,  but if they weren't, they just added a lot more inventory than they were expecting. This supply must now be distributed....

Plain and Simple: the only reason I'm not saying this auction was terrible is because yields were so low prior to the issue that it likely kept some accounts on the sidelines. This is illustrated via the high bid-to-cover ratio and low "hit rate" seen from direct bidders. Indirect buyers were definitely interested, but only at cheaper costs/higher yields while primary dealers are forced to buy if other accounts show a lack of interest.  In the end, either supply concessions were large enough for dealers or they thought buyside interest would've been bigger from directs and indirects. This doesn't mean the "flight to safety" is losing its hold on the market as much as it implies the issue was too expensive.

Mortgages started the day slow, recovered from early session losses, then traded in two way flows (fast$ profit taking and servicer activity), and have since reverted back to the one way "supply wanted" madness . Rate sheet influential MBS continue to trade well in this environment...

The September delivery FNCL 4.0 is currently -0-01 at 101-13. While we're still in the red, FNCL 4.0 price levels are well above the intraday low of 101-05. The September delivery FNCL 4.5 is UNCH at 103-21 after printing a low of 103-16. The secondary market current coupon is 0.4bps higher at 3.751%. Yield spreads are at the tights of the day/week/month.

After two reprices, loan pricing  is 1.4bps weaker and buydowns are 2.2bps more expensive today. In general I would say all the majors are worse today with the exception of one, which threw off the average. On a week over week basis, pricing is only 8.1bps worse but buydowns are  11.6bps more expensive, with the biggest rebate reductions seen in note rates used to fill 4.0 MBS coupon buckets.

Two of the major lenders are not pricing anything over 5.00%  and none of the major lenders are selling forward 5.0 coupon production. I keep hearing anecdotal evidence of more new 4.0 coupon supply than 4.5 but seldom see it show up in daily origination summaries  from dealers. One of the major lender's MBS desk says they saw 1% of their new orig. flow into 3.5s last week, 33% into 4.0s, and 66% into 4.5s.  So either servicers are cherry picking 4.0 supply directly from the origination pipeline or  the majority of loans are closing at or above 4.75%, which makes sense after risk-based LLPAs. Personal feedback is appreciated. What is the rate you most commonly quote?

After making a run at 4.375% last week, borrower "best execution" is still 4.50%. The highest rate in the conventional market (refi's) s/be 5.25%.

Three of the top five lenders continue to pad their pricing. Check out the "BE vs. Man" column.  This is the difference between "Best Efforts" and "Mandatory" pricing.  A wider spread implies these lenders are nervous about capacity constraints and are hedging new locks with more profit margin to compensate for the chance of increased fallout and greater buyback potential.

The two lenders who repriced for the better this morning were the least aggressive out the gate, and also two of the first to publish this AM.  You may see another one of the majors reprice for the better (Citi) but I'm not holding my breath. If it happens, consider it a gift.  If a wholesaler or pass-through lender offer reprices...please let us know!