Results of the Treasury's $19 billion auction of five-year notes were weak, despite the five-year's yield having moved more than 90 basis points above last month's low of 2.20% (March 17). The results signal increased preferences toward riskier assets such as corporate equities and corporate bonds, which fits with recent trends in the financial markets.
The results should be seen as good news in light of recent anxieties in the financial markets, with investors moving away from risk-free assets.
The bid/cover ratio for today's auction was 1.65, the lowest bid/cover ratio since February 2003 and well below the one-year average of about 2.40. The cover ratio, however, was based on an average auction size of $13.75 billion, which means the average size of bids submitted for the past year's five-year auctions was $33 billion, which equates to a cover ratio of 1.74 for auction sizes such as today's record $19 billion auction. This means that although today's cover ratio was below normal, it was not materially below normal, as the headline figure suggests.
A glaring signal of the auction's tepid demand was its yield. The stop-out rate, which is the rate awarded to all bidders (this was a Dutch-style auction), was 3.159%, well above expectations for a yield of between 3.12% and 3.135% (Market News data). In other words, not only was the amount of bids low, bidders were not aggressive.