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Trading  | May 9, 2018

Bond traders and analysts were closely following today’s 10 Year Treasury auction, in a day in which the yield on the 10Y had hugged the 3.000% for much of the day, for one simple reason: they wanted to know if this would be the first auction since early 2011 to have a 3.00% cash coupon. For that to happen, the auction stop would have to print modestly above 3% and heading into the auction that seemed possible, with the yield rising as high as 3.01%.

However, it was not meant to be, because despite trading north of 3.00% in the secondary market, both the When Issued and the auction stop level ended up being just fractionally below the key level: the 10Y priced at a high yield of 2.995%, tailing fractionally to the 2.994% When Issued, although both were better than the prevailing market rate.

But the immediate implication is that the cash coupon, i.e., rate on the auction would not be 3.00%, but one step below it, or 2.875%. So at least one more month without the long-awaited 3.00% coupon.

Putting the auction in context, the high yield of 2.995% was the highest since 3.009% in January 2014, and was 20bps above the 2.795% in the April auction. Still, it was not enough.

The internals were less exciting, if stronger than last month, with the bid to cover rising from 2.46 to 2.56, above the 6-month average of 2.47.

Indirects ended up taking down 63% of the allotment, above last month’s 53.2%, and just shy of the 63.92 6-auction average. And with Directs taking down 8.3%, just shy of 8.4% last month and higher than the 7.4% average, this meant Dealers were left with 28.7%, right on top of the average.

Overall, a strong auction, and certainly stronger than where it had been trading in the secondary market, where it appears someone was almost incented to have the first 3%+ stop since Jan 2014.

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