As reported yesterday when we showed [4]the very special rate that the 3 Year was trading in repo (-1.45%, same as today), many were looking to today's 3 Year auction to relieve some of the collateral shortage issues that have developed across various asset classes. And sure enough, following last month's abysmal 3 Year auction [5], today's pricing of $32 billion in 3 Year paper [6]was like night and day compared to a month ago.
With the high yield of 0.719% stopping well through the When Issued which was trading at 0.724% at 1 PM, this was the first indication of how strong today's pricing would be.
Whether this was due to the surge in the yield over the past 2 months, or simply due to Dealers scrambling to get some paper to satisfy collateral needs, is unknown, but the Bid To Cover surging from 2.946 in June to 3.350 showed that the internal were quite solid as well. Finally, the takedown breakdown was in line with historical averages, with Dealers getting 51.5% (Trailing 12 Months at 55.0%) which however was the lowest since January - will the $16.4 billion allotted to Dealers be enough to satisfy collateral needs for one more month? Indirects got 35.6% (above the TTM average of 26.8%), and Directs stepped up, taking down 13% compared to 8.4% last month, although below the 13.0% average.
All in all, a solid auction and a good appetizer to tomorrow's just as important, and just as special (-0.85% today) 10 Year.
[7]
Look at tomorrow's 3Y repo rate to drop back to zero following today's auction, or else just like in gold, there is something seriously wrong with collateral pathways.