Ahead of today's 2 Year auction there was consternation whether it would be a big flop, or just a modest tail, with so much of the December rate hike jitters focused on the short end. It was neither, and in fact, pricing at 0.948, it printed solidly 0.7 bps through the 0.955 When Issued while the Bid to Cover jumped notably from 3.013 to 3.154.
The internals were also solid, with Directs jumping from 11% to 19% - the highest since June 2014 - of the takedown, Indirects up from 40% to 45.7%, leaving just 35% to the Dealers, the lowest since July.
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Perhaps at a yield of just under 1%, the highest since May 2010, there is an increase in relative value demand. Nowhere is this more visible than when looking at the German 2 Year Bund, which earlier today hit a new record low, just shy of -0.40% (yes, negative).
As shown on the chart below, the spread between US and German 2 Year paper is now the widest it has been since August 2006, and surely provide a better yield than comparable paper in Europe, even if the guarantee of ECB purchases may guararntee that capital appreciation in negative yielding paper will continue indefinitely.
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