🏛📝 Treasury Auction Results 101

Now that you understand the logistics of a Treasury auction, let's turn to how to interpret auction results. We'll review the BTC ratio, the high yield, auction tails, and a failed auction.

1) Bid to Cover Ratio

One of the first things traders look at is the Bid to Cover ratio (often referred to as BTC). A simple statistic, this is just the total amount of bids received divided by the amount of bonds sold at an auction.

In the previous auction example, the total bids amounted to $140 million and the auction was for $100 million of notes, so the BTC ratio would be 1.4x (which is disastrously low btw). We can see towards the bottom of the results page that yesterday's 30Y auction had a BTC of 2.24 (which is also horrendous).

Like many stats, what we're often looking for is changes from prior periods: Is the BTC ratio rising or falling? And how rapidly? If market liquidity is drying up, this would be a good first indicator. If the BTC were to drop low enough, it’s a major red flag.

2) The High Yield

Another, usually much more important, metric to keep an eye on is the stop price, aka the high yield — the actual yield received by bidders in the auction.

Remember how we said these securities trade in a when-issued market before and leading up to an auction? This creates what is called the snap price. It sets the price expectations for an auction and is a critical piece of information for investors.

Was the auction overbid or underbid?

In overbidding, the stop (high yield) is lower than the snap (when issued yield), and this is usually seen as a strong auction. With underbidding, the stop is higher than the snap, indicating a weak auction.

3) The Auction Tail

Another thing we’re looking for with the high yield, and a bond-fan favorite is called the auction tail. The tail is the high yield minus the bond’s when-issued yield.

If there is no measurable tail, we say that the auction finished on the screws. A negative tail means that the auction went better than expected, with higher-than-expected demand.

But positive tail (a tailing auction) tells us the auction did not go well because the yield realized in the auction exceeded market expectations, meaning weaker-than-expected demand.

Bottom line, the tail measures unanticipated Treasury demand shifts before auction.

The larger the tail, the worse the auction.

And if we ever see a tail in the 4, 5, or 6bp range, this would be considered disastrous in the bond world and mean things are breaking down in US Treasuries. Yesterday's tail in 30Y was 5.3bp.

4) Total Fail

Going back to the BTC Ratio, you may wonder what happens if Treasury holds an auction and receives fewer bids than face value of the securities they're selling. This would mean the BTC falls below 1, and the Treasury failed to raise as much money as they expected.

In the bond world, this is a failed auction and nothing short of catastrophic for the US Treasury.