Rate Hike Jitters Return In Poor, Tailing 7Y Treasury Auction

And just like that the rate market’s perception has shifted. Following two stellar auctions earlier this week, namely a blockbuster auction of 2Y and 5Y bonds, which saw such strong demand we concluded that nobody appeared to be concerned about tomorrow’s Yellen testimony at least in the primary bond market. That, however changed moments ago when the Treasury sold $28 billion “belly”, 7Y bonds, at a yield of 1.423%, tailing the When Issued by 1.3 bps, the first tail in this tenor since February.

The internals were comparably ugly, with the Bid to Cover sliding from 2.514 to 2.383, below the 12MMA of 2.51, as Indirects failed to make a strong appearance, taking down only 58.33%, the lowest since March, leaving Dealers holding 31.3% of the take down, the most since February. Directs ended up with 10.39% of the auction.

Why the change? Some have pointed out the unexpected Hilsenrath piece in the WSJ earlier, which may be a harbinger of something big to come from Yellen, others are saying it is mostly curve flows, although the sudden shift in sentiment from the previous two auctions is at least on the surface, notable.

So will the skeptical 7Y be right, and will Yellen blow out the curve tomorrow if she delivers a far more hawkish statement than 85% on Wall Street expect? The answer will be revealed tomorrow.

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