Yesterday, when we commented on the far stronger than expected 10Y auction, we previewed today's 30Y auction and said [5]: "To those curious how tomorrow's 30Y auction will do: look at the repo rate on 30Y paper in the morning. If very negative, expect 3 out of 3 impressive auctions for the week."
Those who followed our advice saw that first thing today, the 30Year was trading -0.35% in repo, the most negative in the past week (while the 10Y slumped into super special territory), suggesting yet another shortage of underlying collateral as a result of abnormal shorting and what would result in another dramatic squeeze into the auction.
[6]
Sure enough, with the repo rate quite negative all day, moments ago the 30Y priced in what was likely the strongest auction of 2015 based on the the Bid to Cover, which soared from 2.2 to 2.54, the highest since December. The yield priced at 3.138%, 0.9 bps through the When Issued as a result of a jump in Indirect, who took down 52.0%, the most since last July's 53.2%, leaving 14.4% to Directs and just 33.6% to Dealers, the least since December.
And with that, this week's trio of auctions concludes on a very strong note, with shorts who had hoped the auctions would be a disaster punched in the face. More importantly, in the illiquid bond market one can now discern a clear pattern that any time the short overhang results in negative repo rates, it virtually assures strong auctions. And since collateral scarcity has never been worse due to the Fed and other central banks, expect repo to be negative for a long, long time.
