Having documented the unprecedented shortage of underlying 10Y paper as a result of record low repo rates which have been at "fails" for the past week, everyone was anxiously awaiting today's 10Y auction to see just how the market would soak up today's $20 billion in 10 year paper. And the answer, somewhat surprisingly, was lousy because traditionally when there is a massive, and in this case record, short overhang, the auction tends to price through the when issued. Not this time, because moments ago the 10Y printed at 1.895%, tailing by 0.6bps to the 1.889% When Issued.
The internals were outright ugly, with the Bid To Cover dropping to 2.49 from 2.56 a month ago, the lowest since August 2015. The Indirects - aka foreign official accounts such as central banks and reserve managers - stepped away and received just 56.5% of the final allotment, the lowest since January 2015, and with Directs also dropping to just 11.1%, or the lowest since October 2015, this meant that Dealers ended up holding 32.4% of the auction, the highest since January 2015.
Bottom line, whether the result of the overnight fireworks in the Japanese bond market, or some still unknown reason, today's auction was a dud.
Which brings up the next question: now that the 10Y is over, will the issue drop back to 0% in repo, or will the shortage persists with ongoing near-fails rates, and if so, just who is it that continues to press for higher yields?