The US government borrows by selling bonds at regular auctions, and most of them pass without much notice. Occasionally, though, a single auction result can move yields, the dollar and even stocks. When that happens, you will often hear traders talk about a “tail”. It is one of the quickest ways to judge whether investors were keen to buy.
How a Treasury auction works
The US Treasury sells bills, notes and bonds on a published schedule. Investors submit bids stating how much they want to buy and at what yield. The Treasury accepts bids starting from the lowest yield, which is the best price for the government, and works upwards until the full amount is sold. The highest accepted yield, known as the high yield or stop-out yield, sets the rate everyone who is allocated receives.
Our guide to how 10-year Treasury auctions work covers the mechanics in more detail.
What a tail is
Before an auction, the bond being sold already trades in the market on a “when-issued” basis. That gives a market estimate of where the auction should clear. If the auction’s high yield comes in above the when-issued yield at the deadline, the difference is called a tail. It means the Treasury had to offer a higher yield than expected to sell all the debt, which suggests demand was weaker than hoped.
If the high yield comes in below the when-issued yield, the auction is said to have “stopped through”. That suggests strong demand, because investors were willing to accept a lower yield than the market expected.
Other measures traders check
The tail is not the only gauge. The bid-to-cover ratio compares the total amount of bids with the amount sold. A higher ratio usually signals stronger demand. Traders also watch how much was taken by different types of buyer. Indirect bidders, which include foreign central banks and investors bidding through dealers, are often seen as a sign of real demand. Primary dealers, the banks obliged to bid, end up taking whatever is left. A large dealer allocation can suggest end investors were not keen.
Why it matters to markets
A weak auction with a large tail can push yields higher across the curve, because it suggests investors want more compensation to hold US government debt. Higher yields can strengthen the dollar and weigh on stocks, especially growth stocks whose valuations depend on future earnings. A strong auction can have the opposite effect.
Long-dated auctions, such as 10-year and 30-year bonds, tend to get the most attention, because they say most about investors’ appetite for long-term US debt at a time of large government borrowing. Our guide to budget deficits explains why that supply is growing.
Keep it in proportion
A single tail is not a crisis. Auctions can be weak because of a busy week of supply, a holiday, a shift in rate expectations or simply poor timing. Traders look for a pattern across several auctions before drawing big conclusions about demand for US debt. The market reaction in the minutes after the result, and whether it lasts into the next day, is often more telling than the number itself.
How to follow an auction
US Treasury auction results are published at 1pm New York time, which is 6pm in London for most of the year, apart from a few weeks around the clock changes. Check the high yield against the when-issued yield just before the deadline, look at the bid-to-cover ratio and the dealer allocation, and then watch how yields move over the following hour.
The bottom line
A tail is the gap between where an auction was expected to clear and where it actually cleared. A big tail suggests weak demand, and a stop-through suggests strong demand. It is a small number that can move big markets. If you want to understand how you react to sudden moves on data you did not expect to matter, take the free Samuel & Co Trading trader assessment.
