Weak 5-year auction leads to bond selling

In the wake of the failed U.K. auction of 40-year gilts, the bond market is paying close attention to this week's U.S. Treasury auctions. We're in the process of selling $98 billion of 2-year, 5-year, and 7-year notes, the biggest weekly sales of longer-term debt in U.S. history. And while I wouldn't call the 5-year auction a failure, it certainly wasn't strong.

The $34 billion of 5-year notes were sold at a yield of 1.849%, above pre-market talk of 1.801%, per Bloomberg. The bid-to-cover ratio came in at 2.02, below the average of 2.18 at the last 10 sales and down from 2.21 in the February auction. Indirect bidders purchased just 30% of the notes on offer, down from 48.9% at the last auction and the lowest since December.

Bonds are getting spanked in the wake of this sale. The long bond futures are down 1 26/32 now, with a virulent sell off taking place after the auction results came public at 1 p.m. What makes the sell off all the more interesting is that it is happening DESPITE the first actual Fed purchases of U.S. Treasuries. The Fed bought $7.5 billion of Treasuries with maturities in the 2016 to 2019 timeframe.