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Strong Demand For "Stopping Through" 5Y Paper, As Fed Looms

While yesterday's unexpectedly strong 2Y auction left many scratching their heads (recall 2Y net specs are the shortest on record, betting on ever higher short-end rates), today's sale of $34 billion in 5Y paper was just as strong, if not quite as perplexing as neither technical positioning, nor a hawkish Fed announcement in less than an hour would have as negative an impact on the price of the tenor. This was the highest yield for a 5Y auction since the 1.95% yield in March.

And speaking of the auction results, it was almost as strong as yesterday's 2Y, pricing at a yield of 1.884%, stopping through the When Issued 1.892% by 0.8 bps, the biggest stop through since December 2016. The internals were similarly impressive, with foreign buyers, i.e. Indirects, taking down 69.8% of the auction, above last month's 65.2%, above the 6month average of 63.6%, and the highest since December 2016. Direct bidders were awarded 6.2%, weaker than the 9.2% in June, and below the 6M average of 6.8%. As a result, Dealers took down 24.1%, below the 25.6% in June, and well below the 6 month auction average of 29.6%.

Overall, another very strong auction and what made it most interesting is that it priced with the Fed announcement due out in 50 minutes, which if this week's TSY sales are any indication, will be about as far from hawkish as possible.