Another Catastrophic 30Y Auction Triggers The Alarm Ahead Of Tomorrow’s Nosebleeding CPI Print
If this week’s 3Y auction was stellar (thanks to a surge of short covering), yesterday’s 10Y mediocre (despite significant short covering), then today’s 30Y was almost catastrophic, and could have been much uglier than last month’s “30Y Tantrum” auction if it wasn’t for the massive short covering into the auction, which made the auction somewhat better than it could have been. To be sure, tomorrow’s CPI print was surely a major factor in the lack of buyside demand for the ultra-long dated paper.
Pricing at a high yield of 1.895%, the auction tailed the When issued 1.863% by a whopping 3.2bps, which was better than last month’s devastating 5.2bps tail but as a reminder this has been a month where shorts get squeezed hard into the auction as pricing has been very special in repo. In other words, if it wasn’t for the shorts, today’s tail would have easily been bigger than last month’s catastrophic 5.2bps tail.
The bid to cover was just ugly too, and while not quite as ugly as last month’s 2.202, it printed at 2.219, well below the six-auction average of 2.290.
The internals were also ugly, with Indirects taking down 60.8%, slightly stronger than last month’s 59.0%, if also below the recent average of 64.2%. And with Directs taking down 18.5%, this left Dealers with 20.71%.
The near record tail on a day that saw the curve tighten aggressively, sparked broad based revulsion – especially since traders were expecting a far better result due to the residual short overhang – and moments after the results of the catastrophic 30Y auction were revealed, the curve spiked, with the long-end spiking for the second month in a row.
And just in case the Fed is still unclear what is going on, this is the market – some six months the Fed has to hike rates – tantruming and making it clear that it will not buy paper anywhere close to current levels if the Fed indeed abandons its QE commitment and subsequently hikes rates. Because two huge tails in a row is the clearest signal the market can send to Powell about what comes next if the Fed does not halt tapering soon. And with another nosebleeding CPI print on deck tomorrow, we can only imagine what will happen if we get a 7% print.
Last month we said, “brace for far, far uglier auctions in the coming months from a market that is now fully habituated to getting everything it wants from the Fed.” Today’s auction confirmed just that.
We also said that at this rate, the market will get what it wants, namely another QE, “it just has to wait a bit until stocks drops 10% or so before Powell throws in the towel.” We still believe this is precisely what will happen.
Thu, 12/09/2021 – 13:21