They may yield nothing (technically 0.295% nominal yield), and they may be still sold by the Fed, but today's 2 Year bond auction had a blistering metric that showed that something is very much unwell with the market. Coming at a Bid to Cover of 4.02, broad demand for today's $35 billion [7] in 2 years was the second highest only below November 2011's 4.07. What happened on November 21, 2011? Well, the world was ending for one, or if not the entire world, then certainly Europe which for those who remember, had to be rescued one short week later courtesy of a coordinated global central bank intervention when the Fed and Europe not only renewed their FX swaps, but lowered the rate paid to OIS+50. So do the bondholders know something about today's market plunge that is not being said? We will find out soon.
What else happened today? Nothing short of an unprecedented surge in Direct Bid take down, which soared to an all time high for the series, closing at a whopping 35.41% of the total, more than either Indirects or Primary Dealers! Who was it: Pimco or China? The rumors are about to start.
[8]
The direct result of the surge in Direct Bidders is that Primary Dealers, or the traditional backstop behind every auction, tendered a massive $97.6 billion which Accepting only $9.8 billion, or a 10% hit rate. As the chart below shows the dealer Hit Rate was the lowest since 2006, or well after the advent of the "New Norma" when every move in the markets is pre-cleared with Ben Bernanke.
[9]
And to think it only took a modest 20 point drop in the ES to expose all the nasty dirt in the bond market. One wonder what we would discover if, as is increasingly probable, we get another Flash Crash, and just how the Fed will telegraph coming inflation if everyone continues scrambling to the Fed frontrunning comfort of the long Treasury end...