Why *Only* That Specific One?

The bid-to-cover had tumbled to just 2.045, which was its lowest on record.

Even the auction’s low accepted yield spiked to 95 bps, the narrowest range for bids this maturity had seen since early 2019. In other words, there wasn’t the usual overbidding at huge premiums on February 25 like there had been certainly throughout 2019 and 2020.

All that would have been consistent with rising inflation fears.

However, in the meantime Treasury has auctioned off another round of 7s, this sale on March 25. Unlike the previous one, the latest went off without incident. Like before, another $62 billion offered only in late March $138.5 billion in overall (private) bids for a much better bid-to-cover of 2.233; still a touch low but not unusually so and nearly right on the recent declining trend.

In other words, the February 25 7-year auction sticks out like a sore thumb. There’s not been another like it – and not just for the 7s. Go to the 10-year benchmark, for example, like the 2s shown above every single one of its recent auctions has been on-the-screws in every way imaginable:

This has been true at auctions held both before the awful 7s on February 25, as well as the last two, the first of those concluded on March 10 and then the latest pulled off just yesterday (April 13). Up and down the yield curve, what we find is that Treasury auctions have been absolutely fine except that one. Not specific maturity, specific auction specifically on that specific day.

February 25.

What must have been so special and unique about this isolated case it all went so badly? In this one instance, a little more than $16 billion in bids (at the low end yields, meaning highest prices) disappeared when compared to the 7s auction of January 28, about 12%.

Given that dealers are typically those in highest demand and therefore responsible for most if not all the high prices and lowest awarded yields, it’s reasonable to further question why dealers seem to have shirked a substantial chunk of their otherwise normal capacities on only February 25.

Remember, two days before, February 23, the 2-year auction had gone off at record parameters despite also having been conducted right in the middle of the same reflation-mania. And the 2s are highly susceptible to volatility.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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