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Mediocre, Tailing 2Y Auction Stops At Highest Yield Since October 2008

With everyone and their grandmother short the short-end of the curve, if not enough to push repo rates into negative territory and just begging for a short squeeze, moments ago the Treasury sold $26 billion in 2Y paper in a largely average if somewhat disappointing auction, which will only embolden the bears to press the short end more.

The auction stopped at 1.596%, tailing the When Issued of 1.591% by 0.5bps; this was the highest yield for a 2Y auction since October 2008. The auction bid/cover ratio was 2.74, down from last month's 2.88. The average bid/cover was 2.79 over the prior year, but a stronger 2.93 over the prior six months. Non-comps were $129.5 million this month, up from $118.8 million last month, and there were $100 million in FIMA non-comps.

The Internals were a modest improvement to last month, with Indirects taking down 48.2%, up from 44.2% in September, but well below the 53.5% six auction average; Direct bidders were awarded 14.15% vs the 6 month average of 15.1% and below last month's 19.0% while Dealers were awarded 37.7%, up from 36.8% last month and well above the six prior average of 31.4%.

Overall, a mediocre auction which could have been even worse in light of today's ongoing risk on euphoria, and in light of a virtual certainty that the Fed will hike not only in December but continue tightening over the next year. The only question is whether the disappointing auction will prompt a parallel widening in the curve or if, as has been the case in recent months, the curve flattens even more.