What a Treasury Auction Tail Actually Tells You

One o’clock. Three numbers appear on a page almost nobody has open. Stop yield 4.34%. When issued yield at the bidding deadline, 4.32%. Bid to cover 2.24, against an average nearer 2.42 for the last several sales of that maturity. Dealers took twenty one percent, against something closer to fourteen.

By ten past one the long end had sold off. Equities had noticed. The headline number responsible was two basis points.

If you are new to the auction calendar this sounds absurd. Two hundredths of a percentage point, on one sale of one security, moving markets that have nothing to do with it. The size of the number is beside the point. What matters is what it is measured against.

The tail is a comparison

Before an auction settles, the security trades on a when issued basis, and that trading produces a yield the market believes the auction ought to clear at. It exists right up until bidding closes. Then it is gone.

The auction clears at whatever yield is required to place the entire amount on offer. The tail is the gap between the two: tail = auction stop yield - when issued yield. A higher stop means buyers demanded a better price than the market had assumed minutes earlier. The auction is said to have tailed.

So a two basis point tail is a measurement of a forecasting error at extremely short range, made by people who commit real money on both sides of the estimate and who have every reason to get it right. Very little else in macro has that property. Most data is a survey of something that finished happening weeks ago.

Two other lines sit alongside it. Neither is interpretable on its own. Bid to cover, total bids divided by the amount offered, tells you how much demand turned up relative to supply, and it only means anything against the average for that same maturity. The allotment breakdown shows how much went to indirect bidders, a category that includes foreign official accounts, against how much the primary dealers were left holding. Dealers bid to clear the auction if nobody else will. So a large dealer take down describes an auction that had to be rescued.

On the afternoon I am describing, all three pointed the same way. That is what turned a small number into a move.

Why one sale travels

Treasuries price everything. The yield on government debt is the base on which corporate borrowing, mortgage rates and equity discount rates are built, so a change in what buyers require for new government supply propagates outward before anybody has decided what it means.

The second reason concerns the future. Issuance is a schedule, so an auction that struggles raises a question about the next one and the one after that. When a long dated sale tails repeatedly, the market is being told something about the price at which this quantity of duration can be absorbed, and that is a larger matter than a single Wednesday.

Two basis points also does more to a long bond than to a short one, which is worth holding in your head when you see the reaction, because on a bond with a modified duration of roughly 17, a two basis point rise in yield is about 17 x 0.0002 = 0.0034, or a third of a percent of price, which on a hundred dollars of face value is thirty four cents. Small on one bond. Applied across the outstanding long end, it is a number with commas in it.

How I follow them

I keep the results page open. They are published within seconds and take under a minute to read. The commentary that follows is somebody else’s compression of the same four lines.

I keep the recent averages written down beside them, because the readings are meaningless without a reference. A bid to cover that sounds weak may be entirely normal for that maturity. A tail of half a basis point on a note that usually stops exactly on the screws is a larger event than two basis points on one that habitually wanders.

The instruments themselves, how the auctions are structured, and the tax treatment are covered in Treasury bills, notes, bonds and TIPS. If the yield measures behind the headline number are unfamiliar, bond yields explained works through current yield, yield to maturity and yield to call with the arithmetic shown. And the bond yield calculator will show you what a two basis point change does to the price of a long dated bond, which is the step that makes the whole thing stop being abstract.