Only one word to explain the just completed 10 year reopening auction. WTF!!! While the 10 year When Issued was trading at 1.516% at 1pm, when the release hit of the final High Yield on the bond, jaws dropped, as it came at a shocking 1.459%, nearly 6 bps inside of the WI, a record, a yield which also was a record, a Bid To Cover of 3.61 which was the second highest ever, second only to the 3.72 in April 2010, but it was the internals that were the most jarring of all. Unlike all recent auctions in the past 4 years, the Primary Dealer take down was only 14% a record low in recent years, and a hit rate of 6.8%, another record low. The offset: Directs, which took down a whopping 45.4%, another record, after tendering a record $16.9 billion in bids. All in all there was no definitive reason to explain why this auction was so very, very off the charts, and so mispriced by the secondary market, suffice to say WTF, and that this is what happens when there continues to be just one game in town: frontrun the Fed! Three possibilities: i) either someone was caught massively wrong-footed going into the auction and covered a massive short into the primary market, ii) capital reallocation from European money market funds which as we explained last week are now all dead, or iii) some "Direct" entity somewhere, has a gaping need for good collateral and would literally pay anything for US paper ahead of an even bigger margin call. The reason we say this is that only 51.7% of the auction priced at the high yield (remember: Dutch Auction): and the low yield was 1.36% - someone, supposedly a Direct Bidder, was in a furious rush to get any paper, at any price. If the latter, we will find out very soon.
S&P 500 futures went absolutely dead for a few minutes with negligible volume as we are sure algos all got triggered to close. Now ES is drifting lower to catch up to 10Y response function: