Yesterday’s 21 billion 10-year auction closed at a fresh 2010 low yield, 2.67%, the lowest since January 2009's 2.419%. The bid to cover jumped from 3.04 to 3.21, in line since the 2010 average of 3.16. Yet the most notable observation (confirming our expectation that indirect bidders have a soft spot for the 10-year, or front running the Fed ever to the right on the curve) was the indirect take down which came at the highest number, 54.7%, since September 2009. Direct bidders plunged to the lowest since November 2009. The auction came in tight of the when-issued (2.685%), meaning there was a selloff into the auction.
Today, the Treasury is scheduled to auction $13 billion in 30s in a reopening on Thursday. Most 30-year auctions have tailed, only four of the past 12 have come through, and recent auctions have not come through as much. Having said that, broker/dealer participation has come down in recent months, and indirect bidder takedown has increased, driven by foreign investors.
Also today, the Fed is scheduled to purchase securities in the February 13 to July 14 maturity bucket. Last time, it bought $1.35 billion (almost all in issues from the three-year series) of relatively cheap securities, as measured by the weighted average spread to the Treasury spline.
The Fed’s Beige book prepared for the September 21 FOMC meeting by stating there was “continued growth in national economic activity” from mid-July to end-Aug, “but with widespread signs of a deceleration compared with preceding.” Five areas, NY, Philly, Richmond, Atlanta and Chicago, “all highlighted mixed conditions or deceleration.” Note that in July, only the Atlanta and Chicago areas said activity had slowed. Home sales slowed further, prompting a slowdown in construction. Demand for commercial real estate remained quite weak, and banks saw stable or slightly lower loan demand and noted modest improvements in credit quality. Price and wage pressures were quite limited.
The July trade balance is -$42.8 billion (consensus: -$47.0 billion) versus -$49.8 billion in June as imports ($4.2 billion) and exports ($2.8 billion) increased to their highest amount since Aug 2008, in a perfect combination. Of note, non-oil exports were $100.9 billion, their best since Sept 2008. The real trade balance stands only slightly narrower than the second-quarter average, suggesting only a minor lift to GDP.
Initial jobless claims declined -27,000 to 451,000 in the Sept 4 week, well below the 470,000 expected. A Labor Department analyst said that due to Sept 6 Labor Day holiday, nine states were unable to report figures and so were estimated. However, the analyst stressed that a large drop in claims was not the result of estimated data and not to expect large revisions next week. The four-week moving average was -9,250 to 477,750. Continuing claims -2,000 to 4.478 million (consensus forecast 4.450 million). The four-week moving average declined to 477,750 last week, from 487,000.
In early morning trade, Treasuries are selling off modestly with the long end of the curve’s 10s and 30s paying the biggest price. Currently, the 10-year Treasury benchmark is yielding 2.7%, up four basis points from yesterday’s close. The yield on the long bond is 3.78%, up five basis points from the close. Equities in pre-market trading are pointing to a higher open, with S&P futures now higher by eight points.
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