5 yr note auction not good, is sea change upon us?

With the backdrop of a 5 yr note yield at the highest level since mid Jan, the 5 yr auction was not good and the higher yield was still not tempting enough. The yield at 2.605% was well above the when issued level of about 2.56-2.57%. The bid to cover of 2.55 is above the one year average of 2.46 but is the lowest since Sept ’09. Indirect bidders totaled 39.7% which is the smallest since July ’09 and direct bidders came in at 10.8%. I don’t know if it was the healthcare bill and the budget/debt concerns associated with it, or the Fitch downgrade of Portugal, or a reaction to the slow recent creep up in LIBOR rates or a delayed reaction to the optimistic message the stock market has sent on the economy or a reaction to the improving economy, however modest but something has changed in the US Treasury market and the benchmark 10 yr rate is just within 1-2 bps of breaking out.

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