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A strong auction is typically a positive for sentiment, and possibly points towards further institutional buying in the secondary market if some missed out on buying at the auction if bids were not placed at a high enough level.
There are three main factors to watch when Treasury auction results are published, typically around 2 minutes after the sale concludes. These are, in order of importance:
All of this information will be published by news wires, and is also often available via social media, a reputable audio squawk, or the Treasury website itself.
This is the single most important indicator of whether demand at a particular auction was strong or weak, given that all US Treasury auctions are ‘Dutch’ in nature, meaning that any and all successful bidders end up paying the same price, and therefore receiving the same yield.
The key focus in terms of the high yield at an auction is how that figure compares to the ‘When Issued’ yield (WI yield) - i.e., the prevailing market yield of a particular security just before the auction bidding deadline (this is also known as the snap price).
When the auction results are published, there are three possible scenarios that may pan out:
Generally speaking, auctions that stop through by a significant amount are considered ‘strong’, while those with chunky tails are considered ‘weak’. However, these concepts must be considered in line with how previous auctions of the same term have faded, whereby auctions that stop through by a greater amount than the prior auction of the same security are considered even stronger.
Buyers at US Treasury auctions are split into 3 categories:
This is simply calculated as the number of bids placed in the auction vs. the amount of bonds that were ultimately sold.
Crudely, one can state that the higher the bid-to-cover ratio, the better the auction, due to the perceived greater demand for the bonds on offer.
However, the bid-to-cover ratio can be easily manipulated by dealers submitting bids that are significantly below the expected auction price of the bond being sold, knowing that their bids won’t get filled, in an attempt to create an optical illusion whereby demand for the bond in question looks significantly higher than it is in reality. For this reason, bid-to-cover is best ignored.
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