Moments ago, the US Treasury concluded an auction which we admit fared far worse than we had expected, as it was a clear breach with a recent pattern seen of strong than expected primary issuance into a market that had a significant collateral shortage ahead of auctions.
As a reminder, one recurring pattern that we had noticed months ago, and which had a nearly 100% predictive hit record, was that on auction days when there is a major lack of collateral as evidenced by a negative repo rate, Tsy auctions were stellar. Today, was just such a day, with the 5 Year repo printing well special at -0.85% this morning as ICAP reported.
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All else equal this would have meant a big scramble to cover shorts into the auction and a high yield well tighter than the When Issued.
Only not today. Because for all those who expected the yield to price through the when issued, the result was a surprising 1 basis point tail to the 1.700% W.I., with the auction of $35 billion in 5 Year bonds pricing at 1.710%.
Worse, the internal were rather poor as well with a 2.39 Bid to Cover, below the 2.58 TTM average, and the lowest since March. Indeed, as the black line in the chart below shows, the downward trend in Bids to Cover for the 5 year tenor is once again sliding downward.
Finally, with Directs taking down only 5.6%, or just over half of the TTM average, leaving Indirects with 56.6% of the lowest since March, it meant Dealers had to back up the truck and be left holding the remaining 38.0% of the final take down.
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So is this a one-off poor auction or the start of a trend whereby even on days of collateral shortage the demand for paper is just not there? We will find out more during tomorrow's final for this week 7 Year issue, but the real answer may not come until the next 10Year is auction next week.
