US Treasuries – Reading Auction Results

US Treasury auction results are an important short term driver of the US Fixed Income market since they provides insights on real demand for underlying securities. Strong auctions are good for sentiment and could indicate real buying to come into the market if any institutions missed out on buying in the auction because they didn’t bid high enough.

Note: If you are interested in European or UK bond auctions, please check our Reading Government Bond Auctions recap – analysis and terminology is a bit different.

Was the auction result good, bad or just ok? 

To determine if the results of the auction are good, bad or just ok we need to analyse the results against the expectations for that auction and previous auctions for Treasuries of the same term.  Many traders look first for bid to cover data (probably wrongly in most cases).  In general we think the order of importance is (1) high yield, (2) bidder allocations and (3) bid to cover data (discussed in detail below).

The US Treasury provides a lot of information with the results of each auction but most of it is not needed for a quick analysis of the strength of the auction.  Below is a screenshot (annotated and trimmed at the purple lines) of the official results for the 10y auction on 8^th February 2017, highlighting the key elements we look for.  However, in this raw form the data still isn’t very useful – we need comparison points from prior auctions.  InTouch Fixed Income provide these details with coverage of each auction.

https://www.treasurydirect.gov/instit/annceresult/press/preanre/2017/R_20170208_1.pdf

After the auction results, the 10y future (TY) sold of quickly as the pricing was soft (tailed by 1.7bp), bid to cover was soft and bidder allocation data was mixed (indirects good, directs soft).

Looking at each factor in more detail:

1. Bid to Cover

Many traders see the bid to cover as the headline indicator of whether the auction was strong or weak and the market often reacts directly to this figure, although it’s debatable how useful it really is.  It’s popular because it’s easy to understand, it’s widely available (quoted by all newswires) and at face value it is a good proxy for the strength of the auction.  However, the cover can be manipulated or inflated by dealers submitting bids significantly below the expected auction price of the bond (optically makes it look like significantly higher demand for the bond)

Bid to cover is the ratio of the amount of bids in the auction vs the amount of bonds sold.  The higher the cover is, generally the better the auction.  To put the result in context, traders compare the cover for an auction against covers in previous auctions in bonds of the same term.  Some compare the cover to the average from the last 3 or 4 auctions.  If it’s higher, that would indicate a strong auction while lower would indicate a weaker auction.

2. High Yield – Trade Through / Tail

Probably the single most important indicator of whether the auction was strong or weak.  The yield at which a Treasury auctions clears is a much more reliable indicator of how strong or weak the auction was as it can’t be manipulated like the bid to cover data.

US Treasury auctions are “Dutch” auctions meaning that all successful bidders pay the same price / get the same yield, which is equal to the clearing yield or high yield (the highest yield that the Government needs to pay to sell all the bonds on offer).  The US Treasury also report the median and low yields in the auction but these can be largely ignored – they have no practical implications and are often skewed as there is no disadvantage to bidding aggressively in the auction given that the bidder will buy at the high yield anyway.

Traders look at whether bidders in the auction bought at a yield higher or lower than the prevailing When Issued market yield.  I.e. The difference between the auction high yield and the When Issued yield of that bond just before the auction bidding deadline (the “snap price”).

If the auction high yield is below the snap, it “traded through” the When Issued.  If the auction high yield is above the snap, it “tailed” the When issued.  If the auction high yield is innline with the When Issued, it “stopped on the screws”.  In general, an auction that traded through by a significant margin is seen as positive.  An auction that tailed by a lot is negative.

However, it’s important to put this in context.  Traders need to compare how much an auction trades through by, or tails, against previous auctions of the same term.  Ie auctions that trade through by more than prior auctions are stronger.

Having access to accurate, comprehensive data is very important to make these comparisons.  InTouch Fixed Income has a multi-year database covering all US Treasury issuance which we leverage in analyzing auctions for our clients.

When Issued Market Price

Checking how the When Issued market has performed in the run up to the auction deadline gives more context.

If the When Issued was weak into the bidding deadline (yields rising) then dealers have built in a good concession and a trade through and higher covers may be expected.  Conversely, a tail or lower covers would indicate that even the higher yield on the bond has not attracted buyers in the auction and suggests a particularly weak auction.

If the When Issued was strong into the bidding deadline (yields falling – ie no concession) then even a moderate trade through could be seen as very positive as buyers were willing to accept yields even lower than the already low market yield.

3. Breakdown of the Buyers

The US Treasury includes a partial breakdown of who bought bonds in the auction, split into three categories.  Traders look at this information to get a feel for whether real demand or dealer demand was the main driver in the auction.  The official results page present the data in dollar amounts but for quick interpretation it’s easier to look at it as a percentage of the total – most newswires will do this for you.

Indirect Bidders – any bidder that purchased via an intermediary, including foreign and international monetary authorities placing bids through the New York Fed and accounts buying through a primary dealer.  Includes foreign central banks and financial institutions and domestic asset managers.  Indirects are often seen a proxy for demand from foreign (central bank) accounts (although it’s a less accurate proxy since the rule changes in 2009) and thus a higher percentage allocation is taken as a positive.

Here we see the reaction to the 7y auction on 26^th January 2017.  The TY (10y Future) had been sideways all day up to the auction at 1pm (circled).  The results showed the bid to cover was just ok or slightly soft (2.45 vs 2.54 and 2.68 in prior two auctions) and the high yield was also just ok (stopped on the screws).  Despite this average data the futures rallied to new highs on the day because traders focused on the indirect bidders – well above previous at 72.8%, vs the prior 64%.

Direct Bidders – any non-primary dealer financial institution bidding directly on the auction (not via an intermediary) for bonds that will be held on their own account.  Requires access to TAAPS (application / terminal providing direct access to the auction).  This can include pension funds, hedge funds, insurers, banks, governments and individuals.  Direct bidding is an indicator of real money demand and thus higher percentage allocation is taken as a positive.

Primary Dealers – primary dealers bidding for their own account.  A higher percentage allocation to primary dealers can be seen as a negative as it indicates reduced demand from foreign and domestic real money, requiring the primary dealers to backstop the auction.

Bottom Line

A rough rule of thumb to judge how strong an auction was, is to assess (1) high yield relative to the When Issued (2) bidder allocations and (3) bid to cover data, in that order of importance, and comparing each one to prior auctions in the same term.  The market sometimes changes which metric it is most focused on but that is a good rough guide.

Authors: Michael Colman, Robin Belec