10-Year Auction

The US auction was fairly well received. The bid-cover ratio was 2.62. This compares with 2.47 last month and an average of 2.40 in the past ten auctions. Indirect bidders, which include central banks, took down 34.2%, this is a modest increase from the 31.9% in May and an average of just below 26% in the last ten auctions. Despite these traditional metrics being better than expected, US yields have continued to rise. It is ture the auction was a little sloppy and the tail was large, but given the supply, it is not surprising and would appear to be offset by the more other optics. The main reason that the bonds seem to be still selling off is that large suply continues to loom on the horizon. Tomorrow the government auctions 30-year bonds.

The fact that the dollar is rallying today despite the sell off in stocks and bonds will not be lost on policy makers and investors. The rise in yields, like Lacker today and others previously, is seen as largely a normalization process, The 10-year note yield is approaching 4%. Ideas that the Federal Reserve will increase its purchases of Treasuries before the next FOMC meeting have been dampened in recent days. It is not clear that there is an sufficient appetite among officials to buy a sufficient amount of Treasuries to really cap yields. Fed officials have been clear that that is not the goal of their credit easing policies (note they do not call it quantitative easing any more than Trichet and the ECB--which noticeably stays away from such verbiage).