How To Tell Whether A Bond Auction Is Good Or Bad
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We have a quick question from Vitor asking how can we tell whether a bond auction has been good or bad? This is a great question Vitor, it all comes down to the bid-to-cover ratio.
So, when a government has a bond auction, in this case we are of course waiting for the 10-year bond auction, it’s the US issuing new bonds with the aim of raising capital.
Now there are a couple of things to consider for a bond auction, but the most important one is the bid-t-cover ratio. You see, in today’s example, we know the US is auctioning 38 billion of 10-year notes, and the bid to cover ratio is basically what the ratio was between the bids that dealers or buyers entered bids for versus the total number that was on offer.
So, for example, with tonight’s 10-year auction, with 38 billion on offer, if there are 76billion offers, then the bid to cover ratio will be two, and if there was only less bids then the ratio would decrease and if there was, even more bids then the ratio would increase.
When looking at the bid-to-cover for a specific auction you need to evaluate it relative to the prior release as well as the average over the past couple of auctions. The reason why there was so much fuss about last week’s 7-year bond auction was not because of the bid-to-cover ratio versus the prior which was of course already a big drop, but also in the size of the drop relative to the average over the past couple of auctions. By looking at this data in Eikon going back to 2009 we can see it’s been the lowest bid-to-cover going back to that time, so it was very significant.
This poor take up of the 7-year auction sparked lots of concerns about the frenzied bond sell off we saw at the time and also sparked some fears for the subsequent auction for this week, because if there is such weak demand for bonds we usually see bond prices dip which pushes bond yields higher.
Now, compare that to yesterday’s 3-year auction, we had a solid bid-to-cover ratio both in terms of the previous print but also relative to the last couple of auctions printing the best BTC going back to 2017.
So, turning then to tonight’s 10-year note auction, we already know the prior, and given all the recent concerns about the pace of longer-dated bond yields rising, any print above or below the prior will be important, below 2.37 probably seeing US10Y moving higher and above that seeing US10Y lower.
However, relative to the recent auctions, the biggest surprise would come from a print above 2.6-2.7, topping this recent high, in that event we would expect to see a sizeable retreat in the US10Y given both positioning, as well as the current market environment as well as the softer CPI core print today.
Also, if we see a print close to or below 2.2, that would create fresh angst about the recent frenzied bond selling and would expect to see the US10Y pushing higher substantially, again given the current positioning and the recent big focus in the bond market.
Usually, auctions aren’t this fun and important, but given the context that we are in it’s more important than usual, and will have repercussions for things like Gold as well as the US Dollar.
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Always stay on the right side of the market and know what to trade every day. Sign up for a free trial:
https://financialsource.co
--------------------
We have a quick question from Vitor asking how can we tell whether a bond auction has been good or bad? This is a great question Vitor, it all comes down to the bid-to-cover ratio.
So, when a government has a bond auction, in this case we are of course waiting for the 10-year bond auction, it’s the US issuing new bonds with the aim of raising capital.
Now there are a couple of things to consider for a bond auction, but the most important one is the bid-t-cover ratio. You see, in today’s example, we know the US is auctioning 38 billion of 10-year notes, and the bid to cover ratio is basically what the ratio was between the bids that dealers or buyers entered bids for versus the total number that was on offer.
So, for example, with tonight’s 10-year auction, with 38 billion on offer, if there are 76billion offers, then the bid to cover ratio will be two, and if there was only less bids then the ratio would decrease and if there was, even more bids then the ratio would increase.
When looking at the bid-to-cover for a specific auction you need to evaluate it relative to the prior release as well as the average over the past couple of auctions. The reason why there was so much fuss about last week’s 7-year bond auction was not because of the bid-to-cover ratio versus the prior which was of course already a big drop, but also in the size of the drop relative to the average over the past couple of auctions. By looking at this data in Eikon going back to 2009 we can see it’s been the lowest bid-to-cover going back to that time, so it was very significant.
This poor take up of the 7-year auction sparked lots of concerns about the frenzied bond sell off we saw at the time and also sparked some fears for the subsequent auction for this week, because if there is such weak demand for bonds we usually see bond prices dip which pushes bond yields higher.
Now, compare that to yesterday’s 3-year auction, we had a solid bid-to-cover ratio both in terms of the previous print but also relative to the last couple of auctions printing the best BTC going back to 2017.
So, turning then to tonight’s 10-year note auction, we already know the prior, and given all the recent concerns about the pace of longer-dated bond yields rising, any print above or below the prior will be important, below 2.37 probably seeing US10Y moving higher and above that seeing US10Y lower.
However, relative to the recent auctions, the biggest surprise would come from a print above 2.6-2.7, topping this recent high, in that event we would expect to see a sizeable retreat in the US10Y given both positioning, as well as the current market environment as well as the softer CPI core print today.
Also, if we see a print close to or below 2.2, that would create fresh angst about the recent frenzied bond selling and would expect to see the US10Y pushing higher substantially, again given the current positioning and the recent big focus in the bond market.
Usually, auctions aren’t this fun and important, but given the context that we are in it’s more important than usual, and will have repercussions for things like Gold as well as the US Dollar.
-----
If you find this content helpful, you’ll love Financial Source.
There’s a link below were you can learn more about it
https://financialsource.co
