If yesterday’s 2 Year auction was at best mediocre, today’s auction of $34 billion in 5 Year paper was downright woeful. The high yield of 1.218% tailed the When Issued by a whopping 1.3bps, suggesting far less interest than the market expected. This was confirmed by a look at the fundamentals, which showed a Bid to Cover of just 2.29, far below last month’s 2.60 and below the 12month average of 2.45%. In fact, the Bid to Cover was the lowest since 2009.
That was not all: the Direct Bid collapsed from 11.6% in May to a puny 3.7%, the lowest since June 2013, and with Indirects taking down a below average 57.2%, this mean that Dealers had to take down 39.1%, the highest since August 2015.
The poor auction promptly repriced the curve, sending 10Y yields to their intraday highs.
One factor that may have contibuted to today’s especially ugly auction is that nothing was trading special in repo, which however is how it should be. A more likely explanation is that having feasted on Treasuries ahead of the Brexit vote, with risk on breaking out, there is suddenly an air pocket in demand for Treasuries.
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