Ugly, Tailing 3Y Auction Sees Worst Foreign Demand Since 2023

One week after the Treasury’s refunding announcement unveiled no major changes to the coupon auction schedule for the next few months, instead punting everything to Bills and leading to the following headline this morning:

• *US TREASURY TO AUCTION $100 BILLION IN FOUR-WEEK BILLS

… moments ago we got the first actual refunding auction of the week when the Treasury sold $58BN in 3Y paper in a very mediocre auction. 

The high yield was 3.669%, down from 3.891% in July and the lowest since last September as the market braces for the Fed’s September rate cut. As a reminder, high yields for the tenor peaked recently at 4.332% in January, and have dropped ever since. This was a 0.7bps tail to the 3.662% When Issued, the 3rd consecutive tail and 9th in the past 11 auctions.

The bid to cover was 2.526, above last month’s 2.509, but below the six-auction average of 2.589. 

The internals were uglier: Indirects dropped to 53.99 from 54.11, the lowest since Dec 2023. And with Directs once again awarded a surprisingly high 28.1%, which was down from the record 29.4% in July but otherwise was the 2nd highest on record, Dealers were left with 17.9%, up from 16.5% and the highest since April as buyside demand among foreigners, for 3Y paper remains surprisingly weak.

Overall, this was a poor, tailing 3Y auction, with disappointing foreign demand and a surge in Directs to offset, and not surprisingly the bond market was less than excited after the break, although surprisingly yields have remained subdued with the 10Y trading at 4.20% before and after the auction.