Foreign Central Banks
Following yesterday's surprisingly strong 2 Year auction, the US Treasury pulled off another blistering auction when moments ago it sold $34 billion in 5 year paper (Cusip R77), at a high yield of 1.395%, stopping through the when issued by 0.8 bps, a surprising outcome following two consecutive tailing auctions, with a Bid to Cover of 2.60, the highest since November 2014. Incidentally, the yield of 1.395% was lower than last month's 1.41% when June rate hike odds were in the single digits.
If yesterday's 3Y auction was impressive, and stopped well through the When Issued, today's 10Y was an absolute blockbuster, stopping a whopping 2 bps through the 1.73% When Issued - the biggest stop through since September 2013 - on a yield of 1.71%, the lowest yield since December 2012. The internals were just as astounding, with a whopping 73.5% Indirect take down, the highest on record, and with Directs inline with recent historical averages of 11.8%, this meant that the Dealers were left holding the second lowest on record as foreign central banks scrambled to bid up as much of the paper as they could.
"At the end of the day, negative interest rates are taxes in sheep’s clothing. Few economists would ever claim that raising taxes on households will stimulate spending. So why would they think negative interest rates will?"
"It Has Been A While Since We’ve Had A Profitable Quarter To Report" - Einhorn's First Quarter LetterSubmitted by Tyler Durden on 05/02/2016 18:18 -0400
"It has been a while since we’ve had a profitable quarter to report. Though we would like to make it a habit, trying to manage for quarterly results is really not our philosophy. We think one of our advantages is the ability to be more patient than others, especially as investment horizons appear to be getting shorter.... the Fed’s “data dependency” doesn’t appear to relate to employment, which continues to improve, or core inflation, which is now running above its 2% target. We believe the increasingly adventurous monetary policy is bullish for gold."
The final auction of the week confirms that something is seriously amiss with the market. On one hand, there remains a substantial (short covering) bid to risk assets; on the other buyers just can't get enough of safe paper issued by the government: we saw it in the strong 3Y, the stronger 10Y and now we just got a blistering 30Y which not only priced 2 bps through the When Issued, not only saw a jump in the Bid to Cover from 2.327 to 2.402, the highest since December, but also had an Indirect takedown of 65.1%, the second highest on record and just shy of the 66.0% in September of 2015.
Yesterday's strong 3Y auction was a harbinger. Despite the relentless risk on rally, moments ago the US Treasury had no problems to sell $20 billion in 10 Year paper which priced at a high yield of 1.765% (98.5% allotted), stopping through 1.6 bps through the 1.781% When Issued, the biggest gap since last spring, and well below March's 1.895%. The bid to cover jumped from last month's 2.49, rising to 2.75, well above the 6 month average, and the highest since January.
One month ago, when the Treasury sold 3 Year paper the reception was rather lukewarm when ahead of the March FOMC there was some concern that the Fed may actually hike. Now that any speculation of a rate hike has been shelved indefinitely, there was no problem for the US Treasury to sell this month's batch of 3 Year paper. With the WI trading at 0.894% at 1pm, the high yield printed 0.890%, stopping 0.4 bps through the When Issued.
The US Dollar Index is sitting at 94.62, just above a critical support zone at 93-94. Meanwhile, the Trade-Weighted Dollar Index has pulled back ~3.4% from its high on Jan20’16. It is hard to tell that long USD is a consensus trade because investors have lost their conviction.
The rules of the game are changing. Those stuck within the old paradigm of mainstream finance face huge threats to their retirement....and quite possibly even their current standard of living.
On the surface, today's 2Y auction was not too bad: pricing at a 0.877% high yield, this stopped 0.5 bps through the 0.882% When Issued. That was as good as it got, because the internals were a disaster: the Bid to Cover plunged from 2.907 to just 2.578, the lowest BTC since Dec 2008 and clearly well below the 12TTM average of 3.17. Almost as if investors are no longer too sure in the short end... which makes sense: neither is the Fed, at least until it too unleashes NIRP.
Having documented the unprecedented shortage of underlying 10Y paper as a result of record low repo rates which have been at "fails" for the past week, everyone was anxiously awaiting today's 10Y auction to see just how the market would soak up today's $20 billion in 10 year paper. And the answer, somewhat surprisingly, was lousy because traditionally when there is a massive, and in this case record, short overhang, the auction tends to price through the when issued. Not this time, because moments ago the 10Y printed at 1.895%, tailing by 0.6bps to the 1.889% When Issued.
Moments ago yesterday's postponed 7Y auction priced and what a difference 24 hours makes: while yesterday the 7 Year was trading at about 1.43%, moments ago it priced at a yield of 1.568%., which while the lowest since May 2013, was in two words, an "ugly mess", railing the When Issued of 1.542% by a whopping 2.6 bps, and suggesting that there may well have been a buyer strike both today and perhaps yesterday as well. As a reminder, the Treasury has not provided any details on the reason for the delay.
After yesterday's strong 2Year auction, there was some confusion how today's issue of $34 billion in 5 Year paper would transpire, especially after the previously reported "technical difficulties" which prevented the NY Fed from conducting today's MBS POMO - something that has not happened in years. Well, the results are in and the auction was an absolute blockbuster.
Following the surprising swoon in the Treasury complex which overnight slid lower following the German Bunds lower, only to rebound after Naimi sent oil sliding, it was not clear how big demand would be for today's $26 billion auction in 2 Year paper. Moments ago we got the answer, and it was "solid", with the high yield printing at 0.752%, pricing through the 0.763% When Issued by 1.1 bps, and the lowest yield since Septmber 2015.
The same Fed which for 7 years provide generous funding to offshore commercial banks, is now granting foreign central banks the same arbitrage privilege, one which worst of all, is almost entirely shrouded in secrecy.