Last month, the 3 Year bond auction conducted on May 10 was memorable for 3 reasons: it was the auction that breached the US debt ceiling, it priced at 1.000%, and came at the third highest Bid To Cover in history, despite a decline in Indirect participation. Basically the auction was a massive success primarily due to the Primary Dealer participation, which took down 51.9% of the entire issue, or $16.6 billion of $32 billion. We predicted, accurately, that "Naturally, none of this due to actual demand, but merely due to Primary Dealer expectations of a prompt and profitable flip back to Brian Sack... Look for Cusip QM5 to be briskly monetized as soon as the next 3 Year POMO is announced, when the next POMO schedule is revealed tomorrow at 2 pm." Well the schedule came and went, and following today's just completed $6.4 billion POMO, we see just why all recent bond auctions continue to price at such phenomenal internals: at today's POMO the On The Run QM5 accounted for 3.189 billion of the entire $6.397 billion, or exactly 50%. This follows the May 24 POMO at which QM5 represented $5.14 billion of the total $6.4 billion. In other words, less than a month later, PDs have flipped out of $8.3 billion, or exactly 50% of the entire Dealer allocation at the auction. Basically, had the Dealers not had the backstopped certainty that the Fed would gladly gobble up whatever 3 Years they had for sale, and if heaven forbid, they would be forced to keep $8.3 billion in capital yielding just 1.000% on their books, the auction internals would have been vastly different. But such is life when monetization continues... for another 3 weeks until the POMO barrage ends on June 30. For all those praising the strength of each and every auction, perhaps it would be prudent to wait until July 1 and see just how much interest Dealers have when they don't have the Fed in their back pocket buying up half of the entire auction takedown...
Dealers Flip 50% Of Entire Just Completed "Very Strong" 3 Year Auction Back To Fed's Brian Sack
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