The US treasury will end the coupon auctions for the week with the sale of $22 billion 30 year bonds (well 29 years and 11 months bonds).
The sale will provide another key test of long demand, following the strong reception to the 10-year auction yesterday.
However, according to BMO, historically the 30-year auctions have gone close 80% of the time when the previous 10-year auction stopped by at least one basis point. Yesterday's stop through was -1.7 basis points.
That said, today's situation suggests that a favorable outcome is possible. Key factors according to BMO include:
- Production rates: With the 30-year yield climbing above 4.50% this morning and the 5s/30s rising to post-election highs, the value proposition has improved.
- Pre-auction discount: Both relative and absolute valuations have been developed, strengthening the case for demand.
- Low swallow: Financial volatility has returned to its lowest levels since the start of the policy cycle, possibly fueling a stronger bid conviction.
These elements indicate a possible stop.
The success or failure of the auction will depend on results relative to the six-month average of the major components.
- Tail 0.2 basis points
- Apply for 2.44X coverage
- Lead (a measure of domestic demand) 17.8%.
- Indirects (a measure of international demand) 67.7%.
- Retailers 14.5%
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