Last Friday, when we did a cursory check of Treasury repo rates, we noticed something strange on the short end: the 2Y was trading a whopping -2.5% in repo, suggesting a huge build up of short position coming into the auction. And then on Monday, and especially this morning, the repo pressure evaporate almost entirely, sliding to -1.20% and -0.1%, barely special, which was a signal that today's 2Y auction would hardly be the blockbuster issuance some other recent 2Y auctions have been.
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Sure enough, moments ago the sale of $26 billion in 2Year paper was concluded, and it was if not a dud, then certainly lackluster, with a yield of 0.663%, just through the 0.666% When Issued, but it was tthe bid to cover that caught many by surprise: at 3.164 this was the lowest BtC since October's 3.113.
The internals were also weak: Directs dropped to just 10.27% while Indirect slid to 47% from 54.4% in July: this was the lowest foreign central bank participation since May. It means that Dealers had to take 42.6% of the auction, the most since April.
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So while the auction was an easily forgettable one, what is notable is that the back of the envelope mnemonic of looking at repo "specialness" as an indicator of auction strength (or weakness) continues to work as a very good leading indicator of what to expect out of any one day's TSY auction.
