If yesterday's large tailing 5 Year paper sale exhibited some curious ESP ahead of the FOMC's tapering announcement, with a very ugly tail and atrocious internals, then today's 7 Year was quite aware of what was coming. Which is why it was not surprising that the just concluded sale of $29 billion [3]in belly-buster bonds, once again came with a flopping 2 bps tail, pricing at 2.385% or 2 bps wider of the 2.365% when issued, indicating the hiccups in the auction process continue.
Also of note: the 2.385% closing yield was the highest since June 2011, while the Bid to Cover, despite posting a modest bounce from last month's 2.36 to 2.45, has continued the downward trend confirming a notable split in demand for auctions: everything to the left of 5/7 Year is being bid up without failure (due to its assumed "money-good" nature and promises of ZIRP into 2016 and further), while the 7 Year and onward are increasingly starting to spook investors. Finally, the internals showed that while Directs took down less than the TTM average of 19.5% at 17.1%, this was offset modestly by a pick up in Indirect bidders who took down 41.74% of the auction, leaving 41.2% to dealers.
Bottom line: if indeed the Fed continues to taper at $10 billion/meeting (it won't), expect to see the high yield to keep rising every higher in order to find the required buyers now that the Fed - at least superficially - is stepping away.
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