We classified last month’s 2Y auction as “lacklustre.” This month, the best word to describe today’s sale of $26 billion in 2Y paper is “dreadful.”
While the yield on the auction was almost unchanged from last month, coming at 0.760%, it tailed by 1.2bps to the 0.748% When Issued, compared to last month which came on the screws at 0.745%. This was the biggest tail for this maturity going back over a year.
But if the pricing print was troubling, it was the internals that were ghastly, with a Bid to Cover sliding to 2.520, and lowest since December 2008. Worst, foreign central banks, aka Indirect Bidders, took down just 28.8%, the lowest since the summer of 2014, and with Directs taking down a modest 10.33%, this meant that Primary Dealers were left with 59.8% of the auction: the highest since May of 2013.
In short, while stocks continue to ignore the risk of a hawkish Fed this Wednesday, the bond market – and especially the short end – is bracing if not for impact, then certainly for a surprise in two days, when Yellen may hint at even higher short-end rates.
As a result of the poor auction, there has been a modest selling across the curve, with an emphasis on near maturities.
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