If this week's earlier 2 Year and 5 Year auctions were impressive, with either record, or near record, Indirect - aka foreign central bank - take downs leading to blistering bid-side demand and yields pricing comfortably through the When Issued, then something clearly changed in the past 24 hours, because the just concluded 7 Year auction was a mirror image of yesterday's whopping 5 Year.
With a When Issued trading at 2.013%, traders were looking for a high yield to print well inside of that. Instead they got a nearly 1 basis point, or 0.8 bps to be price tail, to 2.021%, even though the Bid to Cover was nominally above last month's 2.384, printing at 2.468. The reason for this almost certainly was the steep drop in the Indirect take down, which dipped from 56.64% in June to just 49.15%, which was the lowest foreign central bank demand since October. And with Directs relatively unchanged, at 12.01%, it mean that Dealers had to step up and take 38.8% of the issue, the most since September of 2014.
And now the question: why the ravenous central bank demand for 2 and 5 Year paper, while ignoring the belly of the curve? We hope to find out during the upcoming 3, 10 and 30 Year auctions, which will confirm if central banks have a maurity target, or if today was just a poor day for the US bond market when it comes to foreign central bankers bidding it up.
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