Very "Special" 5 Year Auction Tails Despite Massive Short Overhang

The most notable thing about today's Treasury auction of $34 billion in 5 Year paper is not what happened after the 1pm announcement of its pricing, but what has been taking placed in the last few days, where as the following charts from SMRA, there has been a major surge in shorts, who have in turn sent the underlying paper "super special" in repo, to the tune of -2.50% as of this morning.

Needless to say, the market was positioned extremely bearishly ahead of today's auction, just like prior to yesterday's 2 Year auction, where only a last minute squeeze made the issue price better than expected.

So what happened today? Well, even with the potential squeeze, today's 5 Year auction still tailed modestly, pricing at a 1.76% high yield, a 0.3bps tail to the 1.757 When Issued. The Bid to Cover of 2.44, was right on top of the 6 month average of 2.43. The internals were likewise unremarkable, with the Indirects taking down 59.8% of the auction, Directs barely showing any interest at 4.5%, as has been the cases since June, and leaving 35.7% to Dealers, fractionally higher than the 6 month average.

For now - and ever since the Trump victory - the shorts have the US rates complex firmly in their clutches. The question is what will be the catalyst that breaks their hold on US paper.