Rates Tumble After Spectacular 2Y Auction; Directs Soar To 3 Year High

If there were some concerns about a Chinese boycott in recent Treasury sales, these were all gone after today's spectacular auction of $40 billion in 2 Year paper. The yield stopped out at a yield of 2.125%, the lowest since January 2018, and stopped through the When Issued 2.135% by 1 basis point.

The internals were impressive from top to bottom as well: starting with the bid to cover, which surged from 2.51 last month to 2.745, well above the 2.52 six auction average, and the highest since August 2018. The closely watched Indirects category, which traditionally captures foreign investor demand - including that of China - was virtually unchanged, dipping to 46.6% from 47.7% last month, and just below the 48.3% recent average. At the same time, Dealers tumbled to 26.2% from 36.5%. The reason: a surge in Direct demand, which nearly doubled from 15.8% last month to 27.2%, the highest since May 2016.

Oberall, a spectacular auction with clear foreign demand, which in turn has sent the entire curve lower, pushing the 10Y yield to new intraday lows of 2.26%, and slamming the 3M-10Y to new cycle lows.