Amid growing concerns that today's 2Y auction could be a disaster as a result of the recent push wider in short-dated yields, yesterday we noted that demand to borrow 2022-2024 maturities spiked since last week, while investor demand to get hold of cash securities to be short either outright or against futures has made specified collaterals more expensive, and the decline in those financing rates has trickled into the general collateral market.
In other words, everyone wanted to be short bonds but few had actual physical locate to short against.
Which brings us into today's 2Y auction when the tenor was trading super special in repo, suggesting there would be major squeeze come the auction. That's precisely what happened because contrary to fears of a disappointing auction, demand for 2Y paper was absolutely stellar (if for all the wrong reasons).
The $60BN sale of two year paper stopped at a high yield of 0.481%, which stopped through the When Issued 0.43% by 0.2bps. Still it was sharply higher than last month's 0.310% and the highest since Feb 2020.
The bid to cover surged to 2.68 from 2.28 in September and was the highest since May as bidder lined up to buy cash bonds so they could then short them.
Internals were also solid with Indirects surging from 45.32% to 58.14% which was also well above the six-auction average of 45.32%. And with Directs taking down 22.30% Dealers were left holding just 19.55%, one of the lowest on record.
In short, today's 2Y auction was stellar but not because traders wanted the exposure outright but because they were so extremely short into the auction, they desperately needed a cash deliverable.