10 Year Auction Spooked By Looming Minutes, Tails 1.1 Bps, Still Prices At Lowest Yield Since June 2013

Ahead of the FOMC Minutes, many seem to have taken a cue from DB's bond trading recos, and taken a flier on today's just concluded reopening of $21 billion in 10 Year paper (technically 9 year 10 month), which probably explains why the 10 year paper just priced at 2.597%, a rather gappy 1.1bps tail to the 2.586% When Issued. Still, pricing at just under 2.60%, this was the lowest 10 Year high yield in over a year, since the 2.21% in June 2013. Considering the recent surge in negative repo rates, expect any freely floating paper to be promptly mopped up despite the apparently weak auction.

The internals were nothing to write home about: the Bid to Cover was 2.57, the lowest since February, and below the 2.68 TTM average. Just like yesterday's 3 Year, Directs were scarce and took down just 13.9%, the lowest since January, and well below the 21.6% takedown hit in May (highest of 2014). Indirects were flat at 39.6%, up from 36.1% a month earlier, if also below the 43.9 average. This means the Dealers were left holding 46.5% of the auction, far above the 37.4 average and the highest since May of 2013 when Dealers were left holding 49.2%.

Of course, with the auction coming just an hour ahead of FOMC Minutes which many suspect may come in more hawkish than any in recent years, it is no surprise that both the auction and the bond market reaction were less than enthused. Our advice: wait until the Minutes smoke clears before deciding what the real demand for high quality collateral truly is.