Yesterday, when observing the "schizophrenic" 2 Year auction [3]we noted that despite deplorable fundamentals, the auction was a scorching success as a result of a dramatic technical short squeeze into the print, the result of a huge "super special" shortage in the repo market, where the paper was trading -2% or under. That led us to correctly predict that the paper would trade deeply through the When Issued, which it did by well over a basis point.
Today, however, when looking at the repo market ahead of the auction we found no such danger of a squeeze: the paper was barely negative in repo, and as recently as yesterday there was no difficulty in procuring 5 Years in repo (contrary to the ongoing shortage of 2 Years) which it appears was not a popular spot for shorting on the curve.
As a result, we were fully expecting not only a tail, but a whopping tail in today's weak market. And that is precisely what we got when moments after we learned that the When Issued was trading at 1.774% before the 1pm announcement, the 5 Year printed at 1.78%, a tail of 1.1 bps, a mirror image of yesterday's squeeze into the auction!
The bad news continued into the internals where like yesterday, the Bid to Cover plunged from 2.52 to 2.32. Like yesterday, this was the lowest BtC since July 2009. Indirects were awarded only 52.5% of the auction, far below the TTM average of 59.2%, while Dealers ended up with 36.5% of the auction as a result of the only silver lining in the auction, an unexpected pick up in the Direct take down to 11%, the highest since July 2014, in a partial carbon copy of yesterday's auction.
[4]
As a result of this weak auction, the entire curve has flattened even more, with the 2Y wider by 8 bps as the yield on the 30Y pushes higher by another 6.5bps.
Looking at the action in the past two days, some have wondered if this is not all just some sovereign wealth fund or a foreign reserve manager dumping US treasurys in the last few days of 2015 in order to obtain much needed US dollars ahead of the new year.
