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