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The Day Ahead: Waiting For a Range Break, and 10yr Treasury Auction

To a significantly greater degree than yesterday's 3yr Treasury auction, today's 10yr auction will have the power to confirm a trend we were beginning to see at the end of last year.  Namely, that investors had finally seen prices fall enough to make buying bonds seem like a good strategic move.  

What would confirmation look like?  There are a variety of ways to assess the strength of an auction, but at 1:01:30pm ET, we'll be looking for the high yield to be below the 1pm "when-issued" yield.  The when-issued (or "WI") 10yr is another version of 10yr Treasuries.  Instead of the buyer receiving the bonds at purchase, they'll receive them when the next crop is issued, typically about a week after the auction.  When-issued trading begins when a new auction is announced.  

Bottom line here is that WI = the expected yield for the auction.  It's one of the most important parts of the auction result.  Then there's bid-to-cover.  This simply measures the ratio of dollars bid vs the total auction amount.  Higher is better.  The ratio of indirect vs direct bidding is also important because it is generally a good proxy for foreign investors.

As always, I put out an "auction preview" on MBS Live that has the targets for WI, bid-to-cover, and Indirects just before the auction.  If there's any sort of a repeat performance of the 5yr auction that kicked off the positive momentum on Dec 28th, we'll know by 1:02pm (the official auction cut-off is 1pm, but results usually don't come out until 1:01:30).

Apart from the auction, there is no significant economic data today, but markets may take a few cues from corporate bond hedging, stocks, and earnings.  In general, bonds are drifting, with 10yr yields waiting for a break, either above 2.42 or below 2.34 to signal the next phase of momentum. 

This MBS Market Commentary is provided in partnership with MBS Live and provided exclusively to MBS Live Subcribers.