While yesterday's ugly auction can be attributed mostly to the tumble in repo "specialness" heading into the auction, perhaps as a result of a surge in supply coming from China, today's just as ugly 5 Year had one catalyst: the one which Zero Hedge broke first last night [4]- concerns about China selling.
As the following table shows, going into today's auction, the 5Y was barely negative, or -0.01% in repo.
[5]
The uglyness started at the very top, with the pricing of 1.463% a tail of 0.6bps to the 1.457% When Issued. But the biggest concern was the bid to cover of just 2.34: this was the lowest BTC since July 2009.
Worse, and confirming that China is clearly out of the market for the time being, was the Indirect take down, which at 50.1% was the lowest since October and with Directs of 7.3% not stepping up, it meant Dealers were stucking holding 42.5% of tthe auction, the lowest since January 2014.
[6]
Why: because as we first reported last night and as virtually every bond desk today is confirming today, China is not only not buying any more, but is actively dumping US paper here. For the sake of the Fed, we can only hope that said dumping will not continue indefinitely because very soon the market's natural ability to soak up paper (recall equity sellers are traditionally bond buyers) will be exhausted very fast, and then the debate whether or not the Fed should do QE4 will become moot very fast.
