The $40b 3 year note auction was pretty good. The yield was right in line with the when issued but the bid to cover of 2.98 is above the ’09 average of 2.72 and matches the level seen in Dec. The level of indirect bidders totaled 38% which is well below the average seen since June of 56.1%. This category makes up mostly foreign buyers. The backdrop for today’s auction whose maturity is sensitive to Fed policy was a lowering of rate hike expectations over the past week and a half. On Dec 31st, the fed funds futures priced in a 78% chance of a 25 bps rate hike by June. Today, prior to the auction, the odds fell to 12%, thus making today’s auction more enticing (rate risk lower) even as the absolute yield is at a 3 week low. Also the global weakness in equities likely brought out some buying.
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