After a solid 2 yr note auction and a weak 5 yr (which came in the midst of yesterday’s messy Treasury day), the 7 yr today was mediocre. The yield at 2.056% was a touch above the when issued. The bid to cover of 2.46 was slightly below the one year average of 2.53. Direct and indirect bidders took a combined 75% of the auction, slightly less than the 12 month average of 78%.
Bottom line, the $64k question now is whether Mario Draghi’s comments is a game changer for global bonds because of the tight correlations. Even though the ECB tried to take back his speech, the euro is still higher, European bond yields are only slightly lower and US yields are up. Fundamentally, if healthcare gets passed soon and gives people hope that tax reform will soon follow, long end yields will move higher. If the Fed keeps tightening into a slow economy, they will fall. I’m of course stating the obvious on these two fundamental factors but what is not obvious is how US Treasuries will trade if we see continued weakness in European sovereigns.