Surprisingly Ugly, Tailing 10Y Auction Spooks Market

Unlike yesterday's 3Y auction, which saw a modest squeeze in the repo market ahead of what was otherwise a strong auction, and continued today trading at 0.0%, earlier today the 10Y was trading comfortably positive, with repo rates around 0.30%, suggesting no shortage of underlying and no incipient short squeeze into today's auction.

So, while it was less surprising that today's 10Y ended up being poorly digested by the market, the market was clearly shocked by just how bad today's sale of $23 billion in 10Y paper went, which priced at a high yield of 2.333%, a huge 1.9bps tail to the 2.314% When Issued.This was the biggest tail in the issue going back all the way to March of 2016.

The Internals were similarly ugly, with the Bid to Cover printing at 2.29, below far below last month's 2.58, and the lowest since November. Indirects took down 65.1% of the allotment, below last month's 70.5, Dealers were left with 30.6%, well higher than the 20.7% in January and Directs ended up with just 4.4%, the lowest since September as either there were no more weak hand shorts left to squeeze or buyers simply decided to pull out in the last minute.

In kneejerk reaction the entire curve has sold off, paring today's gains, but the most surprising reaction was in the USDJPY, which soared by some 30 pips, spiking from 11.750 to above 112.000 immediately, before retracing some of the losses.