We had a feeling there would be a squeeze into today’s 3Y auction after this morning reports of that the OTD was trading tight, and quite “special” at -0.5% in repo, traditionally indicative of a notable lack of deliverable and underlying on the day of the auction.
The repo market is also why just before the auction we wondered if there would be another tradtional repo-driven squeeze into today’s auction:
3Y was -0.50% in repo today. Squeeze?
— zerohedge (@zerohedge) May 10, 2016
And, sure enough, just moments later we got confirmation of precisely such a squeeze because the $24 billion in 3Y paper which according to the When Issued was supposed to price at 0.89%, instead printed at 0.875%, stopping through the WI by a whopping, for this tenor, 1.5 bps.
The internals were, in the words of Stone McCarthy, “stellar”, with the Bid to Cover rising to 2.933, the highest since January, but it was once again the take down where the surprise was because as the chart below shows, the Indirects took down a whopping 61.5%, the highest also sicne January, and with Directs taking down 10.2%, it left only 28.3% for the Dealers, the second lower allottment to the group since 2009.
The market reaction upon the news was to be expected: a sharp pull back in yields especially on the short end.
Amd so, once again, we find that it remains all about positioning and investors being left wrongfooted heading into auctions that have a substantial short overhang.
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