After an ugly, tailing 2Y auction 90 minutes earlier, moments ago the Treasury concluded the second auction for the day in this week’s accelerated issuance schedule, when it sold $47 billion in 5Y paper at a high yield of 3.271%. This was notably not only because it was a whopping 53.5bps higher than the May high yield of 2.736%, but was the highest yield since 2007. More importantly, this was also the biggest tail for teh 5Y tenor since at least 2016 when our records begin.
It only went downhill from there: the bid to cover was just as ugly, printing at 2.28, well below the 2.46% six-auction average, and the lowest since Feb 2021.
And the internals were downright crap, with Indirects tumbling to 56.5% from an already low 62.9% last month; this was the lowest award to foreigners going back to Sept 21. And with Direct taking an in line 19.7% (vs 19.7% recent average), Dealers were left holding a whopping 23.8% of the auction, the first time they were awarded more than Directs since March and the highest Dealer award since Nov 2021.
Overall, this was an unapologetically ugly 5Y auction, one which had the faint smell of that “failed” 7Y auction in Feb of last year, and speaking of failed 7Y auctions, we just may get one of those tomorrow.
Which brings us to another point: if the collapse in buyside demand for US paper is a function of QT, which it very well might be, we expect that the QT-era will be very short lived and will be replaced with QE in the very near future, because as much as the Fed hates inflation, it hates a failed Treasury auction and a broken Treasury market much more…