If yesterday's 2 Year bond auction was a snoozer, today's 5 Year was anything but. First, the pricing was solid, and while the high yeild of 1.72 was the highest since May 2011, it stopped 1.2 bps through the 1.732% When Issued. The Bid to Cover was also solid, rising from 2.74 to 2.81, the highest since March and now appears to have decisively broken the downtrend in BTCs seen through the end of 2013. The most notable features of today's auction however were the internals, where we saw the Direct takedown soar from 9.3% to 25.9%, the second highest on record and only lower than the 30.4% in December 2012. And while Indirects were again flat like in yesterday's auction at 48.2%, it was the Dealers who had to make space, and the resulting Dealer allotment of 25.9% was far lower than the 38.2% in June, and the lowest in auction history.
So yet again: if many at the Fed are expecting 2%, 3% and even 5% Fed Funds rates in 2016, the 5 Year auction begs to differ, and either someone is very wrong or in the coming two years the curve will steepen so much the only debate will be whether it is a double dip recession or outright depression.
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