The US treasury to auction off $40 billion of 10 year notes at the top of the hour

The U.S. Treasury will auction off $40 billion of 10 year notes at the top of the hour.

Below are the key components of the auction, along with the 6 month averages of the components. Traders – and the market – will judge the success or failure of the auction versus the 6-month averages:

• High Yield: Six-Auction Average 3.999%, Previous 4.61%
• Tail: Six-Auction Average 0.9 basis points, Previous 1.8 basis points
• Bid-to-Cover: Six-Auction Average 2.49 times, Previous 2.5 times
• Dealers: Six-Auction Average 14.2%, Previous 18.7%
• Directs: Six-Auction Average 19.7%, Previous 20.9%
• Indirects: Six-Auction Average 66.1%, Previous 60.3%

The bid to cover is a measure of how many bids there are in relation to the amount of bonds auctioned. A higher number in relation to the 6-month average is indicative of a stronger demand.

Directs are a proxy for domestic investor demand. A percentage that is higher than the 6-month average is indicative of strong US demand

Indirects are a proxy for international investor demand. A percentage that is higher than the 6-month average is indicative of a strong overseas demand. Note that the vast majority of 10-year note auctions are purchased by overseas investors.

Dealers are the recognized government bond dealers, that distribute the auction for the treasury and are home to the residual.

Tail is the difference between the WI (“when-issued”) yield at the time of the auction and the actual high-yield of the auction. If the tail is negative, it means that the investors “bid through” the WI level in the market at the time of the auction. That is indicative of a strong demand. If the tail is positive, it means the investors were not willing to buy the bond at the WI level. That is indicative of weak demand.