Another Massive Short Squeeze Leads To Spectacular 5Y Auction
Similar to yesterday’s stellar 2Y auction, which many were worried would see a drop in demand only to be silenced by the burst in demand due to a furious scramble for physical paper on the back of a record front-end short (which we previewed earlier in the week), so a quick look at just how special the 5Y TSY had become ahead of today’s $61BN 5Y auction hinted that we would see another blockbuster sale.
That’s precisely what happened moments ago when the Treasury announced that demand for today’s 5Y auction was absolutely off the charts.
The high yield of 1.157%, while well above last month’s 0.99% and the highest since Jan 2020, stopped through the When Issued 1.182% by a whopping 2.5bps, which is the biggest stop through since we started compiling the data in 2015. It may be the biggest stop through in history.
The Bid to Cover soared from 2.37 to 2.55, far above the recent auction average of 2.37 and the highest since August 2020.
The internals were spectacular as well with the Indirects award surging from 54.3% to 64.8%, the highest since August 2020 and far above the 6-auction average of 59.2%. And with Directs taking down 17.4%, Dealers were left with 17.9% of the auction, the lowest since – you guessed it – August 2020.
Overall, a spectacular auction and even stronger than yesterday’s blockbuster 2Y, but not because traders want to be long bonds per se, but simply because they are scrambling to find physical to deliver for existing short position.
Not surprisingly, news of the stellar auction sent the 5Y to new session lows…
… with the 10Y and 30Y also plumbing daily lows as traders brace for the Fed’s next policy error, and prepare to invert the curve.
Wed, 10/27/2021 – 13:14
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