Dealers Flip 50% Of Entire Just Completed "Very Strong" 3 Year Auction Back To Fed's Brian Sack

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...

Comments

No comments yet! Be the first to add yours.