If Yesterday's 2 Year auction was strong to quite strong, with a soaring Bid to Cover and a yield stopping through the When Issued, today's 5 Year auction of $35 billion [3] in 5 Year paper was ugly to very ugly. With a When Issued trading at 1.578% at 1 pm, there appears to have been an air pocket at the time of pricing, which concluded at a high yield of 1.600%, a rather massive 2.2 bps tail, and a surprising outcome for auctions on this side of the belly. Additionally, this yield was just shy of the 2013 auction highs which hit 1.624% at the peak of Taper Tantrum mania in August. Furthermore, while Bids to Cover in the short end of the spectrum have been steadily rising in recent months, today's auction saw a pronounced drop in the BTC from 2.61 to 2.42, the lowest since August, and well below the TTM average of 2.67. But the real story was in the internals, where Directs took down 11.8%, just shy of the 14.6% TTM average, but it was the Plunge in Indirects from 50% to half that number, or 25.8% that was the true surprise, as it was the lowest Indirect take down since December of 2008!
This meant that the natural backstop, Primary Dealers, had no choice but to buy 62.4% of the final allocation, the highest allotment since April of 2009. In other words, while the near end of the curve is well bid, things are starting to go bump in the night at or around the belly of the curve. Look for much more pain if indeed the Fed were to announce the start of tapering today.
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