Ahead of yesterday [4]'s stellar 10 Year auction, we remarked [5]that the amount of shorting early in the day before most many expected would be an ugly auction, was so high it had pushed the repo rate to -1.79%, the most negative since last May. We said that this not only implies the 10Y shortage is accelerating as the entire derivatives-based world once again runs out of underlying cash securities, but that should a strong 10Y auction materialize, it would likely result in a substantial overshoot as shorts piled in to cover. Just as in fact happened.
However, we did not know whether the auction would clear out the shorts. Today we got the latest repo data from Stone McCarthy, and to our surprise we find that the shorts are still clinging on to the 10Y for dear life, hoping that if not yesterday, then today's 30 Year auction will be so ugly as to force a move wider across the entire curve.
From SMRA [6]: "Even though the 10-year note auction was yesterday, the 10-year note is still trading special this morning. After the auction settlement on Monday the new on the run issue will likely trade near the GC rate."
And some more color: "Pressure on the 3-year note and 30-year bond has loosened since yesterday, though both are still trading special. The 2-year and 5-year notes are both trading tight this morning. The 5-year note often starts to tighten a couple weeks before its auction announcement. None of the off the run issues are particularly tight. The off the run 30-year bond is the tightest off the run issue this morning; it is trading at 9 basis points."
In other words, if today's 30 Year auction is once again stronger than all those who yesterday forecast an assured 10Y tail predict, look for more downside yield pain as not only the 30Y but the 10Y shorts are finally forced to cover.