Blockbuster 3Y Auction: Soaring Indirects And Bid to Cover Scream Fed Hike Is "Policy Error"

So much for worries about a hawkish Fed and a balance sheet "normalization" pressuring bonds yields.

Moments ago the Fed auctioned off both a 6 month Bill in a strong auction, but more importantly conducted a stellar 3 Year auction, which not only stopped through the 1.508% When Issued, printing at 1.500% (83.8% alloted at the high), the lowest yield since February, and the first non-tailing auction since the same month, but it was the internals that took the prize.

The Bid to Cover of 3.00 was the highest since December 2015, and well above the 2.754 6 auction average. But it was the influx of foreign bidders - observed recently in the Fed's custody holdings - that confirmed that foreign buyers are back, with Indirects taking down a whopping 65.6% of the takedown, far above the 51.1 6 month average, and the highest going back all the way to 2009.  Dealers were left with just 28.2% of the auction while Directs were left holding a paltry 6.2%, as foreign buyers crowded out everyone else.

Overall, a surprisingly strong auction in light of the poor rates action observed earlier in the day, and a confirmation that the bid for US paper remains unexpectedly durable despite the Fed's expected rate hike on Wednesday which if this auction is any indication signals the Fed is about the engage in yet another deflationary policy error.