After today's latest selloff in the Treasury complex which has again sent yields to the widest levels since October, many were watching today's first of the week bond auction with trepidation to see if the rout in the secondary market would spill over into the primary. It did not. In fact, pricing at 1.125%, this was precisely on the screws of the When Issued at 1pm, suggesting there was no notable weakness in demand for today's $24 billion in 3 Year paper.
The breakdown: the bid to cover was 3.33, flat with last month's 3.34 and above the LTM average of 3.29. The internals were hardly spectacular either with Indirects (aka central banks) taking down 50.7% of the auction, a fraction weaker than May's 52.7% but far stronger than the LTM average of 41.5%, leaving 9.7% to directs, also a slight drop from the prior month, and 39.6% to Dealers.
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In conclusion, it is likely the auction would have been well weaker had it not been for the substantial short into the auction. As the following chart shows, the amount of shorting of the underlying was so heave that 3Y paper has been consistently negative in repo for the past week. In fact, contrary to spin, there is a material shortage of paper along the entire curve right of the 3 Year, as everything is now special...
... but nothing more so than On the Run 10 Years which once again are the most shorted securities, a fact which will likely make tomorrow's 10Y auction far better than what most expected.
Repo data courtesy of SMRA
