Treasurys Sell Off After Ugly, Tailing 10Y Auction Despite Record Specialness In Repo

If the 3Y TSY auction which priced earlier was stellar, outperforming historical averages on every metric, then the just concluded 9-year, 11-month reopening of CUSIP 3F5 was mediocre at best. Stopping at a high yield of 2.384%, this was a 0.5bps tail to the 2.379% When Issued, and 0.7bps higher than November's 10Y high yield of 2.314%. This was the highest yield since May's 2.40%, and also the 6th straight 10Y reopening to tail. 

The internals were unimpressive too, with the bid-to-cover of 2.37 sliding from last month's 2.48, and below the 6 month auction average of 2.42. There were $47.4bn in total bids for$20.0b in notes sold vs $59.7b in bids for $25.8b in notes sold at last auction.

The buyside was modest, with direct bidders awarded 8.4% vs last auction 9% and 6.50% 6MMA, while interest by Indirect bidders also slumped, down to 57.2% vs last auction 68.0%. Dealers were left holding 34.4%, the highest since September, and nearly 50% more than last auction's 23%.

But was is most surprising is that as we previously noted last week, despite the recent record specialness in repo for 10Y paper, the auction tailed and did not see a notable short squeeze contrary to traditional squeezes we have seen every time the 10Y approaches special in the repo market.

The market's reaction to the ugly auction was predictable: the yield moved higher immediately, rising from 2.37% to 2.38% in a handful of ticks as traders were surprised to see such a disappointing auction despite the record short interest going in.