Goldman Sachs: Auction Results Suggest Long-End Supply May Be Weighing

Goldman Sachs note that "after the 30y refunding auction tailed by 2.8bp, Wednesday saw the new 20y tail by 1.5bp. Both auctions saw an uptick in dealer awards and decline in bid-to-cover versus the prior cycle, suggesting softer end-user demand. While not a refunding auction, Thursday's 30y TIPS reopening also resulted in higher dealer awards amidst lower participation, potentially also reflecting the weaker end-user duration demand. We noted previously that the last time Treasury was boosting long-end duration supply in similar fashion, a reliable refunding auction-related (weighted) yield curve steepening pattern took hold. So far, this observation has been borne out at both the May and August refundings. In addition to steepening going into the 30y refunding auction, weighted curves continued to steepen modestly on average in the week after the auction over the Feb 2009–Feb 2010 period, in contrast to other periods, where pre-refunding steepening tended to reverse after the auction. While the softer long-end auction results may be due to a late summer lull in market activity, we do not find clear historical evidence of seasonality to 30y auction awards in August. Rather, we think that the accumulation of duration supply may have contributed to both the weakness in long-end auction results and the persistence of steepening of weighted curves (and tightening of long-end spreads) in the auction aftermath."