Posted by on July 31, 2017 3:50 pm
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Categories: Auction Auction theory Auctions Bid-to-cover ratio Bond Business Congress Debt Ceiling Economy High Yield Microeconomics Steven Mnuchin United States debt ceiling

Unlike last Monday’s 3M T-Bill auction, which as a reminder priced at the highest yield since the fall of October, but more importantly showed a dramatic “kink” in the 3M-6M bill yield due to growing concerns of a disorderly debt ceiling debate and potential government shutdown…

… moments ago the Treasury auctioned off $39BN in 3M and $33BN in 6M paper, which came off without a hitch – with the 3M stopping through the 1.08% When Issued, pricing at 1.07%, and more importantly, the 6M-3M bill spread has now normalized.

Also of note, last week’s plunging Bid to Cover for the 3M auction which showed widespread buyside concern when bidding for the paper, rebounded sharply and rose from last Monday’s 2.87 to 3.18, while the 6M BTC rebounded from 2.91 to 3.08.

Some more details from Stone McCarthy:

  • The 3-month bill auction stopped at 1.070%, with an 84.46% allocation at the high yield. The 3-month auction bid/cover ratio was 3.18. The average 3-month bid/cover over the past three months was 3.14. The WI was last trading at 1.080% at 11:30 AM. Indirect bidders took down 43.20% of the 3-month bill auction and Direct bidders took down 11.94%.
  • The 6-month bill auction stopped at 1.130%, with a 12.00% allocation at the high yield. The 6-month auction bid/cover ratio was 3.08. The average 6-month bid/cover over the past three months was 3.27. The WI was last trading at 1.120% at 11:30AM. Indirect bidders took down 47.96% of the 6-month bill auction and Direct bidders took down 3.44%.

So are debt ceiling concerns now in the rearview mirror? Perhaps not: one possible explanation is that with today’s quarter end, major financial institutions simply had no choice and had to park cash in any available security, even if it is the “dreaded” 3-Month T-Bill.

Another explanation is that the further we drift from the D-Day, the greater the hope that the fiscal situation will be normalized, leading to stable demand for Bills. On Friday, Treasury Secretary Steve Mnuchin informed Congress that action would be needed on the debt ceiling by September 29th.

“Based upon our available information, I believe that it is critical that Congress act to increase the nation’s borrowing authority by September 29, 2017. I urge Congress to act promptly on this important matter,” Mnuchin wrote in a letter addressed to Speaker Paul Ryan.

This means that with one month before the US “D-Day” and the Bill maturity day, bond traders may simply be assuming that this will be enough time to get the US house back in order.

As we will show in a follow up post, this may prove to be an aggressive assumption. For now, however, stability has returned to the Bill market, and the Treasury market – if only for now – is giving the “all clear” on the upcoming debt ciling and government shutdown discussions.

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