5 Year Auction
After a solid 2 yr note auction yesterday, today’s 5 yr auction was good too. The yield of 1.884% was a touch below the when issued of about 1.89%. The bid to cover of 2.58 was the above the 12 month average of 2.44. Also reflecting healthy demand was the combined direct and indirect bidders took 76% of the auction, thus leaving dealers with just 24%. That compares with the one year average of 31%.
Bottom line, the message sent from the shorter end auctions this week are of the belief that the Fed is barely going to hike rates, if at all. As stated yesterday, one has to go all the way out to the June 2018 fed funds futures contract before seeing one that fully prices in just one more 25 bps rate hike. Go to June 2019 before you see one after that. Basically, the market is saying put a fork in this rate hike cycle. That said, the Fed is viewing QT as a different exercise (even though it is just another form of tightening) and we’ll hopefully see when that starts at 2pm.