US treasury to auction off $70 billion of 5-year notes at 1 PM

Yesterday the US Treasury auctioned off $69 billion of two-year notes with less than average demand. I gave the auction a grade of C-. Today, the treasury will move out the curve with the auction of $70 billion of five-year notes. The auction will take place at 1 PM ET.

As usual, the auction results will be compared to the six month average of the major components including the

• Tail or the high yield rate of the auction compared to the When-issued rate at the time of the auction. A negative tail is generally considered an indication of strong demand.
• The Bid-to-Cover which shows the amount of the bids vs the supply auctioned. If the amount of the bids are greater than the 6 month average it shows stronger demand from buyers. ,
• The Direct % which is a proxy for domestic demand in the US. A number that is higher than the 6-month average is indicative of strong buying from domestic US buyers including insurance companies, pension funds.
• The indirect % which is the proxy for international demand in the US. The indirect buyers represent the largest percentage of buyers in US debt. As such, they are important proxy for demand at each auction.
• The Dealer % or the amount primary dealers in the US are saddled with. Generally speaking, the dealers percentages the smallest of the three groups. If domestic and international buyers do not show up, the dealers are saddled with the rest of the position to distribute over time. A high number represents a poor auction. A low number represents a strong auction.

Below are the six-month averages of those components for comparison to the results. The results will be released shortly after 1 PM.:

• Tail -0.5 basis points
• Bid to cover 2.39X
• Directs 18.2%
• Indirects 70.5%
• Dealers 11.3%

This article was written by Greg Michalowski at www.forexlive.com.