Treasury has just auctioned $32 billion 3-year notes. Even though the market did its best to let the issue cheapen, record low yields and a generally quiet trading environment led to a poor auction. This is evidenced via the "high yield" tail vs. the "When Issued" yield, a well-below average bid to cover ratio, and the huge amount of inventory taken down by primary dealers (thanks to a VERY weak turnout from indirect accounts). 

The bid to cover ratio, a measure of auction demand, was 2.95 bids submitted for every 1 accepted by Treasury. While a 2.95 bid to cover isn't terrible,  it is still well below the five auction average (3.24) and the 10 auction average (3.12).

The high yield was 0.569%, this is a new record low "high yield" for 3s, breaking the previous two "high yield" records which were set in the previous two 3-year note auctions.  The bad news is this "high yield" was above the 1pm "When Issued" yield of 0.573%. Think of the "When Issued" yield as the market's way of pricing mechanism the new issue before it is auctioned (sorta like futures/forwards). Clearly the forward pricing mechanism couldn't cheapen up the issue fast enough.

Primary dealers aka "the street" were awarded a massive 59.1% of the competitive bid and 27.4% of what they bid on. This is a huge takedown by dealers which is indicative weak demand by other accounts. We do not want dealers getting their hands on the majority of the inventory because it makes it easier for them to add a mark-up and re-sell the debt when market conditions warrant.

Direct bidders were awarded 11.9% of the issue and 32.2% of what they bid on. This is below average but in line with the August auction. 

The big story...indirect bidders were M.I.A. Their bid was absent! Indirects took home a paltry 28.9% of the competitive bid, compare that to a five auction average of 44.2% and the ten auction average of 47.5%. Their bidding wasn't aggressive at all but niether was anyone elses.

Plain and Simple: yeh it wasn't the best auction turnout, especially when you compare to recently strong results, but yields are at record lows and this issue was even more expensive than previous fundraisers.   No reason to panic yet but if indirects are a no show at the 10 and 30 year auctions, I will be ringing the alarm bells. Japanese FX intervention and Fed QE should be keeping overseas demand stable. Do they know something we don't know??????

Market Reaction...

The December delivery FNCL 3.5 is now UNCH at 100-27 after being bid as a high as 101-06.   This is a price decline of 11/32. The December FNCL 4.0 is UNCH at 102-31 after being bid as high as 103-06, this is a price decline of 7/32.

ALERT: REPRICES FOR THE WORSE ARE POSSIBLE

NEXT EVENT: FOMC MINUTES AT 2PM

With everyone expecting further QE,  "buying at the lows" should help slow the bleeding.