Moments before today’s 2 Year auction we made a simple prediction:
2Y trading super special: should price well through WI
— zerohedge (@zerohedge) December 28, 2015
The reason for this forecast: as we have repeatedly shown in the past, any time a given CUSIP is trading super special in repo (lack of underlying collateral) just ahead of its auction, there always is a panic scramble to cover shorts into the auction, leading to a super strong high yield relative to the When Issued. And, as the SMRA table below shows, the 2 Year was trading about as special as can be, hitting -2.15% in repo earlier today after trading super special for the past week.
Sure enough, when the When Issued data hit minutes ahead of the auction pricing, we were expecting a number well through the 1.073% When Issued.
This is precisely what happened as the Treasury confirmed moments ago when it announced it had sold $26 billion in 2 Year notes at a yield of 1.056% , a whopping 1.7 bps through the When Issued: just like that, the short squeeze worked again.
That, however, is as good as it gets for today’s short end issuance, because all the other metrics were quite terrible: the Bid to Cover plunged to just 2.796 (52.7% allotted at high, the highest stopout rate since December 2009) from 3.154 a month ago, and the lowest BTC since August of 2009!
Furthermore, the internals were even more confusing: while Indirects took down only 37.5%, or the lowest since December of 2014, it was the Directs who couldn’t get enough and took down a whopping 27.1% of the final allottment, the highest since December of 2013, and nearly double the TTM average of 14.0%
Finally, this means Dealers were left holding 35.4%, about 5% below the 12 month average.
Overall, a schziophrenic auction, with substantial strength driven into the deadline on the back of technicals courtesy of a massive short squeeze, even as fundamentals spooked foreign central banks, leaving domestic bidders to bid up whatever paper they could find.