Following two very strong auctions earlier this week which as we showed previously had a massive short heading into the 1pm deadline, we made a simple prediction: because there was virtually no short overhang in the 30Y this morning, with the paper trading 0.11% in repo...
... we expected the auction to turn out ugly.
3Y and 10Y auctions had huge short into them, and auctions were stellar. Today's 30Y has zero shorting ahead of 1pm suggesting weak outcome
— zerohedge (@zerohedge) May 14, 2015 [3]
This also follows our warning from yesterday [4]when we said that "after the past two days of auctions any fears that there is a secular drop in demand for US Treasurys can promptly disappear... if only until tomorrow's 30 Year which may well fare quite a bit worse if indeed there are concerns about the long-term viability of the deflation trade. "
Sure enough, an ugly 30 Year auction is precisely what we got moments ago when $16 billion in 3 decade paper was sold at a 3.044%, the highest yield since November, and a whopping 1.8bps tail to the 3.026% When Issued.
Just as bad was the Bid to Cover which has barely budged in the past three auctions, scraping the bottom at 2.20, essentially tied for the lowest level since the financial crisis.
The internal breakdown was less relevant but showed that Directs took down 11.1% of the auction, with Dealers getting 38% and Indirects left with 50.8%, the lowest since March.
[5]
And while overall the auction was not dramatically weak, we have now confirmed that the shorting in repo is now the biggest tell when it comes to auction days. Look for this to be promptly arbed by the new generation of bond trading algos.
