Following an almost 50 bps drop in yields over the past month, the $35b 3 year auction was mixed. The yield was almost 3 bps above where the when issued was trading just prior. On the other hand, the bid to cover was good at 2.62 (but below the level of the June auction) and above the average going back through last year of 2.52. The level of indirects totaled 54% but is not comparable to previous auctions because of a change in its measurement. The short end of the curve is most sensitive to expectations of fed policy and the fed funds futures are pricing in the slowest pace of rate hikes in a while. Today’s auction was therefore an easy sell but the recent drop in yields relative to the June auction, made it a touch less attractive. Today’s results say nothing about inflation expectations because of the short maturity. Tomorrow’s 10 year auction though will.
