The U.S. Treasury will auction off $58 billion of 3 year notes at the top of the hour. The auction results will compared to the 6 auction average for the major components. Below are the last values at the last 3 year note auction followed by the 6 auction average.
High Yield: 3.579% (6-auction avg. 3.579%)
Tail: 1.1 bps (6-auction avg. -0.3 bps)
Bid-to-Cover: 2.55x (6-auction avg. 2.66x)
Dealers: 19.5% (6-auction avg. 12.3%)
Directs: 20.7% (6-auction avg. 25.8%)
Indirects: 59.8% (6-auction avg. 61.9%)
What do each of these components represent
Tail: The difference between the auction yield and the when-issued (WI) yield just before the auction
→ Positive tail: weaker demand (investors demanded a higher yield)
→ Negative tail (stop-through): strong demand
Bid-to-Cover: Total bids divided by the amount sold
→ Higher ratio: stronger overall demand and competition
→ Lower ratio: softer demand
Dealers (Primary Dealers): Banks obligated to bid and take down supply if others don’t
→ Higher dealer share: weaker demand from real investors (dealers had to absorb more)
→ Lower dealer share: healthier auction
Directs: Domestic buyers placing bids directly (e.g., mutual funds, pensions, hedge funds)
→ Higher directs: solid domestic real-money demand
→ Lower directs: less domestic participation
Indirects: Typically foreign buyers (central banks, sovereign funds, global investors)
→ Higher indirects: strong foreign demand (generally bullish for Treasuries)
→ Lower indirects: weaker global appetite
Bottom line:
Strong auction: Stop-through/low tail + high bid-to-cover + low dealer take + strong directs/indirects
Weak auction: Positive tail + low bid-to-cover + high dealer share + weak indirect demand**
This article was written by Greg Michalowski at investinglive.com.