Ahead of today’s 2Y auction, there was already a pronounced shortage as manifested by the tumble in the repo rate, which according to SMRA had slide to -1.0% as of this morning.
And, as a result of this potential squeeze, it was thus likely that the just concluded 2Y auction would come in better than expected, which it did moments ago when it printed at 0.75%, stopping 0.3bps through the When Issued. On the other hand, the Bid to Cover of 2.65 was modestly less than the 2.831 in August, and below the 6MMA of 2.72.
The internals were also hardly exiting: Directs took down 18.97%, below the 25.2% last month, while Indirect interest rebounded from 29.0% to 36.7%, if also below the 6MMA of 36.7%. That left 44.37% to the Dealers.
In summary, what could have been a poor auction was at best mediocre courtesy of the ongoing shortage of paper heading into auction days. We expect the repo situation to normalize in the coming days once this auction settles.
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