Dealers Rescue Very Weak 2 Year Auction As Indirects Flee From Short End, Despite Record Low Yield

Tyler Durden's picture

Following recent speculation originating from Bill Gross that Operation Twist would materialize possibly as soon as last week's FOMC statement and cap rates on 2-3 Year Bonds, the yield on the 3 Year had fallen to unprecedented low levels. Well, the FOMC came and went, and now everyone has to wait until this year's version of Jackson Hole for OT2 to come to market. However, many have decided not to wait. Namely foreign central banks: those who are somehow supposed to come in and buy up US debt when the Fed goes away. In the just completed 2 Year auction (CUSIP: RA0), which just priced at a record low yield of 0.395%, which was a nearly 1 bp tail, all the action was behind the headlines: the Bid To Cover tightened substantially from the 3.46 in May to 3.08 currently, but the kicker was the Indirect take down which at a paltry 22% came at the lowest since February 2008, or even before the Bear Stearns implosion, when central planning was merely a gleam in the central planning cartel's eye. As a result Primary Dealers were left holding the bag on this auction, with 64% of the total notional going to Dealer syndicate, and the balance or 13.5% going to Direct Bidders, also a big drop from the 19.2% in May. The problem for the Dealers is that there are no more 2 year focused POMO as part of QE3, so they will all be scrambling to sell the On The Run back to the Fed during the once a month 2 Year targeting POMO as part of the continuing QE Lite.

And this is what an ugly chart looks like from a chart standpoint. Expect much more short-term weakness as the Treasury prepares to flood the market with ultra-short dated paper.

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etrader's picture

The fast money clowns all said buy for a higher close..... Hmmmm

Still looks like someones algo being "toyed with"  @ 1263 ES just to get  hit  180 degrees.

Iam Rich's picture

What's the basket/ES compression trade look like today after this good news?

statlawyer's picture

I need to throw reasoned analysis out the window and start day fading my own trades...

Dr Zaius's picture

I'm still trying to figure out the meaning of such auctions. My assumption is that the paltry indirect bid participation reflects a lack of foreign interest in 2 year bonds.

RobotTrader's picture

Virtually thousands of hedge funds will be buying Treasuries hand over fist if the 200-day fails on SPY.

Built in "put" for Uncle Gorilla.

delivered's picture

Everyone's been waiting for a new currency in the US and now its here. Any US bill/note of less than 2 years basically carries no interest rate and if all goes to form in a month or so, will have rates capped. So what's the difference between USDs/FRNs and 2 year or less USTs? Not much as both basically offer no return, can be printed at will, represent unsecured debt, and used actively in financial transactions (whether in the wholesale or retail markets).

It would appear that the PDs are going to end up with a lot of USTs in the coming months so the disposition of these holdings is going to be very interesting (if the Fed stays on the sidelines). Who are they going to cram down this debt on without having to enhance returns/rates as I have to figure the world in general, has its fill of USTs? If its to the domestic crowd, then put the last stake in the US economy as the US government will finally kill off what's left of "free capital" (and I use this term cautiously) deploying to the private sector.

Iam_Silverman's picture

"Who are they going to cram down this debt on without having to enhance returns/rates as I have to figure the world in general, has its fill of USTs? "

Never underestimate their creativity.  Remember, these guys came up with CDO's as a way to sell mortgages to investors that would have otherwise held their nose and walked away.

Prof Gulliver's picture

The more Bill Gross talks, the more Tim and Ben will do whatever is necessary to make him look wrong.

ivana's picture

exactly. It was fascinating to see the yield rally from 0,854 down to 0,334 (full 100% retrace ABC)

But that will not change reality on FREE bond market where nobody is buying crap.

Until banksters FORCE them to buy ...

narapoiddyslexia's picture

I've heard that the banksters can in fact force them to buy, and will and it will appear seamless to the great unread.

Hank Paulson's picture

Looking at bond auctions is a waste of time, the US does not need bond auctions at all as we are never revenue constrained.  The government does not borrow money and then spend, they spend regardless as they have a monopoly on the money supply.  Bond auctions are only used as a tool to adjust the money supply and auctions can in fact never fail because the market is set before the auction takes place and the dealers don't choose what they want or don't want.  A lot of people are confused how our monetary system works in these regards judging by the posts on bond auctions

kito's picture

if china now takes the stance that it will bail out every european nation who cant borrow, how does it follow that they will now walk away from u.s. debt? china's recent words now make treasury purchases a guarantee. they will not look to destroy the very system they rely upon by letting go of treasuries. bill gross is just plain wrong. 

ivana's picture

Challenging bernankestain and timmey:

looks to me that yields are set to rise next few weeks (till Jackson assholes meeting) since both 10y and 2y retraced perfect ABC to 61% and 100%.

USD may rest swindling around 75-77

lolmao500's picture

Yields have to rise otherwise nobody will buy the bonds when the FED doesn't buy them no more.

AbbeBrel's picture

Hey copper is building a fascinating wedge, the $RUT has gone sideways for 5 days, and Incarnate's List on stockcharts seems to be hinting at a mood reversal.  I thought today's action was boring, but I have changed my mind.   What happens next?   If I knew that, I wouldn't be posting here, I would be eating freshly grilled mozzarella sticks on a beach in Brazil...  As for the bond market, well the surprise is the willingness of the Chinese to bet their foreign currency reserves on discounted bonds.   As El-Erian says - if it is a "technical default" - then it is a buying opportunity.  If not?

But then again the Chinese have been noted to be fond of gambling.  I wonder who will beat whom to that beach in Brazil.

Herbert_guthrie's picture

Will it be safe to burn FRNs?

Nice to know in case there if are any nasty inks or metals being used in the printing process that might have bad health effects.