The 10 yr auction was uneventful. The yield of 2.325% was a hair above the when issued while the bid to cover of 2.45 was about spot on with the one year average of 2.43. Also spot on was that dealers were left with 70.5% of the auction, the same level as the average of the previous 12 months leaving the balance with direct and indirect bidders.
Bottom line, the auction was average but maybe influenced by the rally after Yellen’s prepared testimony. Assuming that QT comes next, what will happen to longer term yields? Well after the previous QE’s were underway, yields went up instead of the hoped for effect by the Fed of down. When QE was finished, yields went down instead of up. The expected reflation/deflation of each move was the obvious reason. This time around I think the analysis is more complicated because of our tighter relationship to the action in bonds overseas. I believe that European yields will only continue higher as they further taper and the question will be whether that’s a magnet for where our yields will go. Or instead, our yields will behave more in line with expectations for US growth and inflation. As much as I want to believe it will be the latter, I still think the pull of higher overseas yields will matter a lot.