Close to the Saturation Point?

From Bloomberg:

2 year note

Demand was only moderate for the Treasury's monthly 2-year note auction, a very large $44 billion offering that posted a soft bid-to-cover ratio of 3.00 vs. a 3.19 average over the last six auctions, all of them $44 billion in size. In a sign of weakness, the high yield of 1.000 percent was nearly 1 basis point over expectations. Dealers ended up holding this issue as non-dealers took down only 45.6 percent of the auction, well under the 55.8 percent average going back to June. Direct bidding by non-dealers, at 13.8 percent, was heavy but not extreme. The Treasury auctions $42 billion of 5-year notes on Wednesday followed by $32 billion of 7-year notes on Thursday.

5 year note

A large tail headlines a very weak 5-year note auction that is sending Treasury yields higher this afternoon. High rate for the auction was 2.605 percent vs. a 1:00 bid of 2.568 percent, making for a 3.7 basis-point tail. The large $42 billion auction posted a bid-to-cover rate of 2.55 for the weakest result of the past six auctions. Non-dealer demand was soft like it was for yesterday's $44 billion 2-year auction. Direct bidding was slightly higher than trend at 10.8 percent but indirect bidding, at 39.7 percent, was below trend. Today's results may raise talk that Treasury supply is outstripping demand and they point to trouble for tomorrow's $32 billion 7-year note auction.

7 year note

A sloppy 3.6 basis-point tail mars the 7-year auction and ends this week's unusual run of poor coupon auctions. High rate for the $32 billion auction was 3.374 percent vs. a 1:00 bid of 3.338. Coverage at 2.61 is the weakest in nearly a year.

Non-dealer interest was unusually light with direct bidding, at 8.1 percent, and indirect bidding, at 41.9 percent, combining for a 50.0 percent share that compares with a 62.1 percent average since June (when bidding rules were changed).

Demand for Treasuries is falling in reaction to the results which raise the question whether supply is finally beginning to outstrip demand. Next week will mark a pause for coupon auctions which will resume the week after with offerings of 3-year, 10-year and 10-year TIPS.


After this weeks poor bond auction results, are we getting closer to reaching the saturation point with Treasuries?

The law of diminishing returns seems to be coming into play with investors demanding higher yields for the risk they are associating with Treasuries.