Those who follow the repo market are well aware that something is quite odd with the 5 Year point on the repo curve. While most other bonds trade normal, the 5 Year OTR trades special. And not just special: really special (see chart below) at -225 bps, a number which has soared in the past 4 days, when it was just 0.00% on September 22. And while we will not discuss what is happening in the repo market in this post (judging by this fact, nothing good), it did help with today's brand spanking new record low yield 5 Year bond auction, which courtesy of the repo skew and certainly courtesy of Operation Twist, just priced at an all time low 1.015%, well inside of the 1.03% When Issued, and printed at a 3.04 Bid To Cover, substantially above the recent average 2.76, not to mention a surge in Indirect Bidding to the tune of 46%, well above the average. So even though the 5 Year auction was a stunning success, sending the 5 Year to under 1%, what it telegraphs is that there is something very messed up in shadow banking, where both money markets and repo are getting gutted courtesy of Europe. We expect ongoing such risk transfer from shadow into sovereign debt: a development which as we discussed previously is very bad.
Chart: Stone McCarthy