Demand for the recent five-year auction dropped to the lowest levels in six months, indicating investors were willing to short the yield curve based on their economic outlook, according to interest-rate strategists.
The auction for the five-year earlier this month was seen as weak because it had a bid-to-cover ratio of 2.32--the lowest since April--according to Ken Fan, interest-rate strategist at ABN AMRO. The ratio for the September auction was 2.72, while August's figure was 2.64. However, September's ratio was artificially boosted by an unusually large direct bid that took down $4.7 billion, Fan said.
Another indicator of weak demand was the yield as implied by the "when issued" spread, which was lower than the yield awarded in the auction. During the past year, the yield typically awarded at Treasury auctions has come through lower than the yield implied by the WI spread going into the auction, by up to three basis points. This time, the yield implied by the spread going into the October five-year auction was a half basis point lower than the awarded yield, according to William Prophet, an interest-rate strategist at UBS.
However, since the sale, the Oct. '09s have been well bid in the secondary market, which is surprising considering the soft demand in the auction, Prophet said.
The bid-to-cover ratio is watched as an indicator of auction demand; the higher the ratio, the higher the demand for the issue. The ratio is calculated by dividing the total bid volume by the issue's size, and comes in the auction press release 15 minutes after the auction.