Two weeks ago we observed a series of Treasury auctions, specifically the 2Y, 5Y and 7Y issues in late October, which were generally in line with historical average except for a perplexing collapse in Direct Bidders. Today, this Direct bidder “boycott” continued, when moments ago the Treasury sold $37 billion in an upsized 3Y auction whose most notable feature was the plunge in the Direct takedown.
First, the big picture: the 3Y auction stopped at a high yield of 2.983%, just below last month’s 2.989% and tailing the When Issued 2.980% by 0.3bps, and the 2nd highest since May 2007. The bid to cover printed at 2.54, also in line with last month’s 2.56 if below the 6 auction average of 2.67.
However, it was the internals where the surprise lay again, because while Indirects took down a strong 49.1%, the highest since July, and above the 42.1 6 auction average, the Directs tumbled again, taking down just 3%, or $1.1 billion, of the auction after tendering $2.8BN in bids. This left Dealers holdings 47.9% of the auction, the highest since December 2016.
As we discussed two weeks ago, it remains a mystery why the Direct bid has suddenly dried out, and due to the Treasury’s somewhat nebulous distinction between Directs and Indirects, as well as what and who Dealers actually buy US paper for, it will be next to impossible to get to the bottom of this recent quandary without the Treasury itself chiming in.
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