A Quick Look: Market Performance After Success Of The Record $107B US Treasury Auction

The Treasury has just undergone a 3-day auction with all of the 2-, 5- and 7-year government debts well-received, suggesting the supply issuance has not been saturated yet.

Demand for the 7-year notes was strong with indirect bidders, contributing 67.2% of the purchase, more than double the level of the last auction in May and the $27B auction was the largest ever for this bond. Together with the $40B and $37B for the 2-year and 5-year auctions, the Treasury sold a record $104B of debts this week.

Strong rally was seen in the 10-year UST whose yields dropped 24 bps this week and closed at 3.55%,to the lowest in 3 weeks, yesterday. Look at the chart below, the yields have almost broken the uptrend formed since March immediately after the Fed announcement of credit easing. In the coming weeks, results of economic data such as non-farm payrolls and ISM will be determining factors on yields,

Apart from the robust auction result, worse-than-expected jobless claims also drove the notes higher. Department of Labor reported that initial jobless claims rose to 627K (consensus: 602K) in the week ended June 20 from a revised 612K in the prior week. This triggered worries that it would take a longer time for economy to recover and interest rate to stay low.

The dollar plunged against major currencies after the auction as recent increase in risk appetite drives investors to higher-yield assets. Against the euro and franc, USD dropped -0.4% to 1.399 and 1.0933 after rising +1% and +3%, respectively after the FOMC meeting. Against commodity currencies(AUD, NZD, CAD) , the greenback slid -0.7%, -0.9% and -0.3%, respectively, due to rallies in commodity prices as well as interest rate differentials. Both being low-yield currencies, USD pared gains against the Japanese yen as yield spread between the 10-year Treasury notes and comparable Japanese bond narrowed to 2.17%, the lowest since June 3.

Stock markets rallied with both Dow Jones Industrial Average and S&P 500 gaining more than +2%. While lower rates were clearly a factor, we believed Fed's elimination of one emergency-lending plan was the main reason as it spurred bullish sentiment. The Fed announced that one for the emergency programs will be eliminated while the sizes of 2 others will be reduced as signs of improvement in the nation's economy and financial markets allowed exits of some stimulus plans