3-Month Bills Turmoil Ahead Of March Debt Ceiling Showdown: Bid To Cover Plunges To 8 Year Lows

Despite the GOP"s tax reform victory, over the past few weeks, Congress once again punted on a formal decision how to keep government funded and what to do with America"s debt ceiling and as a result US legislators simply kicked the can on the agreement of raising the nation’s borrowing limit for another few months. However, with the Treasury expected to breach the ceiling as soon as late March, today"s $45 billion 3-Month Bill auction was closely watched as it serves as a fresh gauge of investor anxiety about the ongoing impasse.

As a reminder, in the first week of December, the Treasury deployed a series of extraordinary measures to stay under the debt ceiling cap since it was reinstated on December 8. But T-bill investors, in both the primary and secondary market,  remain especially wary given questions over what’s known as the debt ceiling’s drop-dead date. Today"s Bills mature March 29, within the Congressional Budget Office’s late-March to early-April window for when Treasury will exhaust the extra capacity it’s using to keep below the $20.5 trillion limit.

Quoted by Bloomberg, Justin Mandeville of Inveso said that the late-December bill auctions “speak volumes to investors being cautious as to when the potential drop-dead date will be,” adding that “we saw it back in July when we had concerns about the October bills.”

And sure enough, having just concluded, the 3M bill was especially ugly, pricing at 1.445%, or a 3bps tail to the 1.415% When Issued, with Indirect Buyers fleeing, and taking down just 20.1% of the finally allotment, down from 30.8% in the last 6 auctions, while Primary Dealers had no choice but to step up aggressively from 61.9% in the 6MMA, to 74% as Direct interest also fizzled from 7.3% in the last 6 auctions to just 5.9%. But nowhere was the revulsion quite so visible as in the bid to cover, which plunged from 3.04 in the past 6 auctions to just 2.71 on Dec. 26: this was the lowest Bid to Cover since January 2009.

As Bloomberg reminds us, at the government’s July 24 auction, the US Treasury sold $39 billion of three-month bills at 1.18 percent, then the highest rate since 2008. The bid to cover for that particular sale also matched the lowest for the maturity since 2009. Congress wound up passing a three-month debt-ceiling suspension Sept. 8, weeks before Treasury Secretary Steven Mnuchin estimated the government would run out of cash.

However, revulsion to paper that could be impacted by the debt ceiling was not just in the primary market: it also hit the secondary Bill market, as the previously noted kink that has emerged in the bill curve between securities maturing in late March and those in early April, has gotten even more pronounced. For several days after the Dec. 18 auction of bills maturing March 22, the rate on these securities was higher than debt maturing a week later. Since then, the rate on securities expiring March 29 has climbed to 1.44%, exceeding those on bills due the following week by nearly 10 bps as shown in the chart below.

And so, looking at the debt ceiling fight that refuses to go away despite the can being kicked every few months, while there is still a chance the issue could be resolved without going down to the wire, it is unlikely: while lawmakers hammered out a spending bill this week to keep the government open through Jan. 19, they didn’t include a provision to lift or suspend the debt ceiling. The longer a resolution remains at the bottom of Congress’s to-do list, the larger the T-bill dislocations could grow. Sooner or later, the bond market - which has been crying wolf on a technical US default - will eventually be right.

Stellar 3Y Auction: Highest Bid To Cover Since Sept 2015, Foreign Demand Surges

Unlike last month"s ugly 3Y auction, today"s just concluded sale of $24 billion in 3 year paper was stellar, stopping through the When Issued 1.934% by 0.2bps, a surge in buyside demand as the Bid to Cover jumped from 2.76 to 3.15, the highest since September 2015, while Indirect Bidders took down the most since August.

The details: the high yield was 1.932% vs six previous auction average 1.572%, it stopped through the WI of 1.394%.

The Bid-to- cover was 3.15, up from 2.76 in October, and well above the previous six auction average of 2.88.

Dealers were awarded 33.6%, slightly below the six previous auction average 35.2%, and down from 37.5% last month, while Direct bidders took down 7.4%, below last month"s 9.0%, and down from the six previous auction average 8.8%.  Finally, foreign central banks and reserve managers, i.e., Indirect bidders were awarded 59.0% vs the 6auction average 56.0%, and up from 53.5% last month. It was also the highest Inidrect award since August 2017.

Overall, a very solid auction and one which sets the stage for today"s second, benchmark bond auction of 10Y paper set for 1pm.

Tailing 2Y Auction Prices At Highest Yield Since September 2008 As Foreign Buyers Stay Away

With 2Y yields having jumped sharply in recent week, it was not surprising that today"s auction of $26 billion in 2Y paper would have a high yield, and sure enough, printing at a high yield 1.765%, the highest since September 2007, tailing the When Issued 1.763% by 0.2bps, and well above the six previous auction average of 1.410%. This was the third consecutive tailing 2Y auction.

The internals were hardly impressive, with the bid-to- cover of 2.725, lower than both last month"s 2.74 and also below the six previous auction average 2.91.  In fact, it was the lowest since January"s 2.682%, with total bids of $72.3bn for $27.4bn in notes sold vs six previous auction average of $78.0b in bids for $28.3b in notes sold.

Also not surprising perhaps is that foreign buyers were less than enthusiastic, with Indirect bidders awarded only 41.9% of the auction, down sharply from last month"s 48.2%, and below the 6 month moving average of 51.7%. It was also the lowest since December 2016. Dealers were awarded almost the same, or 41.2%, far higher than the six previous auction average 32.7%. Finally, direct bidders received 17% of the auction, roughly in line with the 17% average of the prior 6 auctions.

Overall, the auction confirms that investor interest for the short-end of the curve is waning, and suggests that more rate hikes by the Fed are coming, which in turn will push the 2Y yield even higher, further steepening the yield curve in the coming days.

Need A Jumbo Jet? China"s E-bay Can Help You With That...

In a first for not just China, but the entire world, Alibaba"s online auction website, Taobao, has successfully auctioned off two Boeing 747-400 jumbo jets for a combined $49 million.  The jets were bought by Chinese cargo airline SF Airlines after they were seized by courts during Jade Cargo"s bankruptcy proceedings in 2013.  According to the South China Morning Post, the successful online auction was conducted after six failed private auctions.

Two Boeing 747-400 Freighters were sold on Tuesday on Taobao, the online shopping platform owned by Alibaba, for a combined 322.8 million yuan (US$49 million), reflecting the first time such jets were sold via online auction in China, and possibly the first-ever globally at online auction.

 

The sale was concluded after six failed attempts at offline private auctions organised by the seller – a state court – in the past few years.

 

SF Express, China’s largest private courier, bought the jets from the Intermediate People’s Court in the southern city of Shenzhen, which seized them after Jade Cargo International filed for bankruptcy in 2013.

 

Three Boeing 747-400s had been put up for sale on Taobao’s judicial auction arm from Monday to Tuesday. One of the jets parked at the Shenzhen Bao’an International Airport went unsold, with a starting bid of 122.6 million yuan.

According to rules on Taobao’s auction site, bidders were required to make security deposits of 6.1 million yuan, 6.7 million yuan, and 6.8 million yuan for the respective jets before the auction.  The winning bidder now has 15 days to send payment in full according to Taobao auction rules.

Last year, Concord Aerospace, a Florida-based aerospace company, tried to sell a Boeing 747 jumbo jet on eBay, with a starting bid of US$300,000. The aircraft’s four jet engines had been removed and its electrical components had been stripped...needless to say, the plane didn’t sell.

And, for our next item, this entire Chinese Ghost City, complete with dueling horse statues, can be yours for an opening bid of just $10...any takers?

Einstein"s Scribbled Theory On Happiness Sells For $1.6 Million – 195x Highest Expectations

A scribbled note by Albert Einstein which described his theory on the key to happy living was sold at auction in Jerusalem for $1.56m.

According to The Telegraph, the winning bid for the note far exceeded the pre-auction estimate of between $5,000 and $8,000, according to the website of Winner"s auction house.

"It was an all-time record for an auction of a document in Israel," Winner"s spokesman Meni Chadad told AFP…Bidding in person, online and by phone, started at $2,000. A flurry of offers pushed the price rapidly up for about 20 minutes until the final two potential buyers bid against each other by phone. Applause broke out in the room when the sale was announced.

The newspaper reports that Einstein was on a lecture tour of Japan in 1922 and had recently been awarded the Nobel prize. Einstein didn’t have cash to pay a tip to a bellboy in the Imperial Hotel in Tokyo, so he gave him two notes, predicting they would be worth more than a tip. He is reported have said.

“Maybe if you"re lucky those notes will become much more valuable than just a regular tip.”

The Telegraph continues, Einstein dedicated his life to science, but suggested in the notes that fulfilling a long-term ambition doesn"t necessarily guarantee happiness. 

The note said.

“A quiet and modest life brings more joy than a pursuit of success bound with constant unrest.”

The anonymous buyer was from Europe.

The notes were sold by an anonymous Hamburg resident who commented "I am really happy that there are people out there who are still interested in science and history and timeless deliveries in a world which is developing so fast."

On the second note was written “where there’s a will, there’s a way”. It sold for $240,000.

 

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.

Curve Flattens After Blistering 30Y Auction Stops Through, Highest Bid To Cover In Two Years

After yesterday"s stellar 10Y auction, today at 1pm the Treasury sold the last of three weekly auctions, by offering $12 billion in 30Y paper to eager buyers. And eager they were, with the high yield of 2.870% stopping through the When Issued 2.874% by 0.4 bps. This was the biggest strop through on a 30Y auction going back to October 2016.

It wasn"t just the stop out that was strong, but the Bid to Cover as well, which at 2.530 was the highest going all the way back to September 2015. The internals were similary impressive, with Indirects taking down 62.8%, up from 58.8% in September, and on top of the 6 month average of 62.4%. Directs ended up with 10.6%, the highest award since March, higher than the 6.1% average, while Dealers were left holding 26.6% of the auction, the lowest dealer takedown since March, suggesting once again that even a modest increase in yields and foreign duration seekers crawl out of the woorwork and buy any US paper they can find.

Overall, while not a strong as yesterday"s 10Y auction, there were blistering demand for today"s last weekly auction, which was observed earlier courtesy of the 5s30s which has been flattening all day, sending the yield curve to the flattest in years.

Soaring Foreign Demand For Strong, Stopping Through 10Y Auction

Just 90 minutes after today"s strong 3Y auction, moments ago the Treasury sold $20 billion in a 10Y reopening of Cusip 2R0, which saw nothing short of blistering demand at both the close and through the internals. The high yield of 2.346% stopped through the When Issued by 0.2bps, or 2.348%, the first non-tailing 10Y auction since March 2017. This was also the highest yield for 10Y paper since the May 2017 auction.

But while the break in tailing auctions was notable, the internals were even more impressive: the bid to cover of 2.54 soared from last auction"s 2.28, and was above the 2.39 six auction average. Direct Bidders were awarded 6% of the auction, same as September, and right on top of the 6M moving average, however it was the Indirects where the firework were, as foreign buyers took down a whopping 69.1%, which was not only 14% higher than September, but was the highest since January"s 70.5%, and just shy of all time highs. Dealers were left holding just 24.9% of the 10Y auction, the lowest since March.

Overall, a very solid effort, one which confirms that no matter what happens to the macro picture, foreigns will jump at the first opportunity to bid up US 10Y paper when it approaches the recent resistance of 2.40%.

"Tremendous" Demand For 7Y Treasurys; Second Largest Buyside On Record

An ugly 2Y auction (with the highest yield since 2008) on Tuesday, a mediocre 5Y auction yesterday, and now a blistering 7Y auction, in which the Treasury sold $28 billion in "curve belly" notes at a high yield of 2.13%, stopping through the When Issued by a surprisingly strong 1.1bps, the highest since April.

As Stone McCarthy described the auction in one word, "Tremendous", noting it a buyside takedown which was the second largest on record.

The internals were impressive: the bid to cover of 2.70 surged from last month"s 2.46, was solidly above the 2.55 six month average, and was the highest since April. It was also the third highest in the past 5 years. Indirect bidders couldn"t get enough, and were awarded 70.6% of the takedown, their highest allotment since April, and above the 69.3% 6MMA. Likewise, Directs waved it in, and took down 19.0%, the highest since December 2016, leaving Dealers holding only 10.4%, the second lowest award for the class on record, higher only than the 8.8% this past April. 

In short, a very strong auction, whether or not driven by China as SocGen speculated earlier, and one which not only pushed the curve lower, but also sent the USDJPY to session lows, validating one of the strongest correlations we have observed in recent months.

Ugly, Tailing 10Y Auction: Lowest Indirects Since 2016

If yesterday"s 3Y auction was ugly, today"s $20 billion 9-year-11 month reopening was just as abysmal.

With a high yield of 2.18%, this was not only a whopping 1.1bp tail to the 2.169% When Issued, it was the 6th consecutive "tail" in a row, with just 2 10Y auction stopping through so far in 2017 (January and March). That said, the yield was also the lowest since November, which may explain some of the weak bidside interest.

The internals were ugly, with a Bid to Cover of 2.28, fractionally above August"s 2.23, but well below the 6 month average. Just like yesterday, foreign bidders balked, and the Indirect award was a paltry 55.3%, down from 57.9% last month, and below the 63.4% average. This was the lowest Indirect award since November 2016. With Directs once again in line, at 6.0%, just below the 6.8% last month, it was the Dealers who had to step up and they do, taking 38.7% of the final allottment, the highest since November, and well above the 29.3 6 month average.

Finally, what likely prevented today"s auction from printing notably better, is that the recent record specials in repo, which last week hit a sub-fails rate of -3.75%, was completely gone as of this morning, and the 10Y traded at 0.00% in repo at 8am on Tuesday. And with no shorts to squeeze, the result was as expected.

Ugly, Tailing 3Y Auction: Bid to Cover Tumbles, Lowest Indirects Since 2016

Whether due to the broader risk-on move, or as a result of a surge in inflation fears in the aftermath of Hurricanes Irmas and Harvey, today"s auction of $24 billion in 3Y paper was arguably the ugliest yet in 2017.

Printing at a high yield of 1.4330%, while this was the lowest yield since February, it was also a 0.6 bps tail to the 1.427% When Issued. The internals were even uglier, with the Bid to Cover tumbling from 3.13 to 2.70, and below the 6 month average of 2.85. Just as notable was the plunge in the Indirect award, which slumped from 64.1% in August to just 46.2% in August, the lowest since December 2016. And while Directs were largely unchanged from last month, at 10.4%, above the 8.7% 6M average, the Dealer award soared from 25.8% to 43.4%, nearly eclipsing the Inidrect take down, well above the 6 month average of 35.6%, and the highest since December 2016.

Overall, an unexpectedly ugly auction in light of last week"s plunge in bond yields, although perhaps not all that surprising in light of the broad elimination, if only for the time being, of both geopolitical and climate-linked risk. And now, we look forward to the upcoming 10Y auction which may be just as ugly, if not worse should today"s risk on euphoria persist, despite 10Y paper still trading quite special in repo as of this morning.

Debt Ceiling Turmoil: 4Wk Bills Price At Highest Yield Since Sept 2008 On Technical Default Fears

While traditionally few care about T-Bill auction results, which are usually a rather subdued affair, today was different: with today"s $20 billion in 4-Week Bills maturing on October 5, or smack in the middle of the interval when the US is expected to run out of cash absent a debt ceiling deal, there was palpable turmoil in the Bills market, as the yield on the just concluded auction demonstrated.

With the When Issued trading at 1.23%, the just priced auction printed at a high yield of 1.30%, what appears to be a record tail of7 bps, and the highest yield since September 2008. It is also an indication that for all the talk of a reduction in government shutdown/debt ceiling crisis odds, the market will have none of it, as the ongoing "king" in the October bills demonstrates.

The internals were mostly remarkable for the soaring yields, with other components coming roughly in line.:

• High yield 1.300% vs prior six auction average 0.966%


• Bid-to- cover 3.04 vs prior six auction average 3.07


• Dealers awarded 58.5% vs previous six auction average 64.7%


• Direct bidders awarded 16.9% vs prior six auction average 8.6%


• Indirect bidders awarded 24.6% vs prior six auction average 26.6%

Putting the latest T-Bill "Kink" in perspective, the chart below shows just how high the Sept-Oct "hump" has blown out to following the auction.

Primary Dealer Bid Surges In Poor 2Y Auction

While the high yield of the just priced 2Y auction came "on the screws" at 1.345%, below last month"s 1.401%, but above the six previous auction average of 1.305%. and exactly where the When Issued suggested today"s auction of $26 billion in 2Y notes would price, the internals were decidedly weaker than the stop out would suggest.

The bid-to- cover of 2.86 was a notable decline from last month"s 3.06%, as well as below the 6 month average of 2.90%. It was also the lowest since April.

However, the most surprising aspect of today"s auction was the surprising surge in Dealers take down which surged to 41.6%, up from 24.6% in July, the highest since January, and well above the six auction average of 29.3%. And since the direct bidder award of 12.6% was below both July"s 16.9% award and the six previous auction average 15.0%, it meant foreign buyers, aka Indirect bidders, were awarded only 45.8%, a sharp drop from last month"s 58.5%, and below the six previous auction average 55.7%.

Quoted by Bloomberg, FTN strategist Jim Vogel said that metrics fell short of historical benchmarks due to the “odd timing of the sale and general lack of change in short UST since the end of July.”  Bloomberg also notes that the auction was expected to struggle because of U.K. holiday, summer vacations and its position 90 minutes before 5Y issue.

Overall, a rather weak auction which was saved by the jump in Dealer awards, perhaps reflecting growing debt ceiling fears ahead of the X-Date some time in late September, early October.

Lowest Dealer Award On Record In Blistering 5Y Auction

The poor 2Y Auction that concluded just 90 minuets ago is a distant memory, because while the market, and especially Indirect bidders, appeared to balk sale of $26 billion in 2 Year paper, there appeared to be no concerns involving the just concluded sale of $34 billion in 5Y new paper, buyside demand for which could be described as "blistering."

The high yield of 1.742% stopped through the 1.75% When Issued by 0.8bps, with an 18.98% allocation at the high yield. It was the lowest 5Y yield going back to October of last year.

The internals were even more impressive: while the Bid to Cover was unchanged from last month at 2.58, and above the 6 month average of 2.43, the Indirect takedown was just shy of a record at 69.1% (vs 64.7% for the past 6 auction average), and only the jump in the Direct Bid award from 6.2% in July to 13.5%, the highest since July 2014, prevented Indirects from getting an all time high allotment. At the same time, the Dealer award dropped from an already low 24.1% in July to just 17.5%, the lowest in 5Y auction history.

In summary: an odd day in which in the span of 90 minutes we saw one poor and one stellar auction, for reasons that are not exactly clear.

"Stellar" 3 Year Auction: Highest Bid To Cover Since 2015

Launching this week"s Treasury issuance of 3, 10 and 30Y paper, this afternoon"s 3-year note auction results was "stellar", as Stone McCarthy put it.

The auction stopped 0.9 bps through the 1.529% When Issued, printing at 1.520% - the third consecutive "stopping through" auction in a row - with the highest bid/cover in more than a year and a half, as 3.13 bids tendered for every dollar, the highest since December 2015, far above the 2.80 6 month average. There were $75.1BN bids for $24BN in notes sold (ex-SOMA).

The internals were also impressive, with foreign buyers, or Indirects, awarded 64.1%, above last month"s 52.6% and above the 6MMA of 54.6%. The $20.960 billion Indirect bid today was far above the $15.229 billion average of the prior six months. In fact, outside of the $22.296 billion bid in June, it was the largest since January 2012. The hit ration was good for a bid of that size, boosting the Indirect takedown to 64.5% which is well above the 54.6% average of the prior six months. That is the third largest Indirect takedown on record, behind only the 65.6% takedown two months ago and the record 68.5% takedown in November 2009.

Directs took down 10.2%, also above the 6 month average of 8.37. The $3.969 billion size of the bid compares to an average of $3.681 billion over the prior six months, and the 61.1% hit ratio was strong. The combination pushed the Direct bidder takedown to 10.2% of the auction today, which is the largest since July 2016. Direct bidders had takedown down an average of 8.4% of the auctions over the past six months.

The 74.2% combined buyside takedown was the second largest on record, behind only the 76.1% takedown at the November 2009 auction.

Even the Dealer bid - which was left with 25.8% of the final allotment, the second lowest in history - was much improved this month. The $50.058 billion size of the bid compares to an average of $48.055 billion over the past six months. The strength of the buyside bid meant that dealers largely missed on those bids though, leaving them with only 25.8% of the auction today. As the mirror of the buyside, that is the third smallest Dealer takedown on record. 

Overall, another strong auction on the short-end of the curve, suggesting that there may have been an outsized element of short covering following today"s much more hawkish then expected JOLTS report which sent the USD surging, and prompted speculation about a faster than expected tightening by the Fed.

No Fireworks In Today's Bill Auction: Has The Debt Ceiling Crisis Passed?

Unlike last Monday"s 3M T-Bill auction, which as a reminder priced at the highest yield since the fall of October, but more importantly showed a dramatic "kink" in the 3M-6M bill yield due to growing concerns of a disorderly debt ceiling debate and potential government shutdown...

... moments ago the Treasury auctioned off $39BN in 3M and $33BN in 6M paper, which came off without a hitch - with the 3M stopping through the 1.08% When Issued, pricing at 1.07%, and more importantly, the 6M-3M bill spread has now normalized.

Also of note, last week"s plunging Bid to Cover for the 3M auction which showed widespread buyside concern when bidding for the paper, rebounded sharply and rose from last Monday"s 2.87 to 3.18, while the 6M BTC rebounded from 2.91 to 3.08.

Some more details from Stone McCarthy:

• The 3-month bill auction stopped at 1.070%, with an 84.46% allocation at the high yield. The 3-month auction bid/cover ratio was 3.18. The average 3-month bid/cover over the past three months was 3.14. The WI was last trading at 1.080% at 11:30 AM. Indirect bidders took down 43.20% of the 3-month bill auction and Direct bidders took down 11.94%.


• The 6-month bill auction stopped at 1.130%, with a 12.00% allocation at the high yield. The 6-month auction bid/cover ratio was 3.08. The average 6-month bid/cover over the past three months was 3.27. The WI was last trading at 1.120% at 11:30AM. Indirect bidders took down 47.96% of the 6-month bill auction and Direct bidders took down 3.44%.

So are debt ceiling concerns now in the rearview mirror? Perhaps not: one possible explanation is that with today"s quarter end, major financial institutions simply had no choice and had to park cash in any available security, even if it is the "dreaded" 3-Month T-Bill.

Another explanation is that the further we drift from the D-Day, the greater the hope that the fiscal situation will be normalized, leading to stable demand for Bills. On Friday, Treasury Secretary Steve Mnuchin informed Congress that action would be needed on the debt ceiling by September 29th.

"Based upon our available information, I believe that it is critical that Congress act to increase the nation"s borrowing authority by September 29, 2017. I urge Congress to act promptly on this important matter," Mnuchin wrote in a letter addressed to Speaker Paul Ryan.

This means that with one month before the US "D-Day" and the Bill maturity day, bond traders may simply be assuming that this will be enough time to get the US house back in order.

As we will show in a follow up post, this may prove to be an aggressive assumption. For now, however, stability has returned to the Bill market, and the Treasury market - if only for now - is giving the "all clear" on the upcoming debt ciling and government shutdown discussions.

Mediocre, Tailing 7 Year Auction Following Yesterday's Short Squeeze

After two surprisingly strong auctions earlier in the week, when the Treasury sold both 2 and 5 Year paper to unexpectedly brisk demand ahead of the FOMC meeting, which bounced despite a record high short interest in 2Y futs, moments ago the last auction of the week closed when $28 billion in 7 Year paper was sold at a high yield of 2.126%, tailing the When Issued 2.122%, and the highest yield since 2.215% in March.

The internals were mediocre, with the bid-to-cover of 2.54 better than last month"s 2.461%, if right on top of the six auction average of 2.54%.  Indirect bidders took down 67.7%, also better than last month"s 67.4%  and above the 6MMA of 69.3%, as direct bidders were awarded 11.6%, more than the 9.4% taken down in June and the 6 auction average of 10.4%. Finally, Dealers were left with 20.6%, the lowest since April"s record low 8.8% and below the 6MMA 20.2%.

While the auction was not nearly as exciting as the last two, perhaps much of that has to do with the post-Fed rally observed yesterday, which forced short covering, mostly on the short end, but also broadly across the curve. And with less shorts to squeeze, the result was a rather mediocre auction.

Ahead Of The Fed: Strongest Demand For 2Y Paper Since 2015; Lowest Dealer Award On Record

With the FOMC members currently huddling deep inside the bowels of the Marriner Eccles building, perhaps scheming how to spook markets by announcing a surprise rate hike tomorrow, one would have assumed demand for 2 Year paper in today"s auction would be less than stellar. One would be wrong, because moments ago the Treasury sold $26bn in 2 year paper to what was clearly an overabundance of demand: the high yield of 1.395% stopped through the When Issued 1.401% by 0.6 bps, and was the highest yield going back to October 2008.

The bid-to-cover rose to 3.06 from 3.03 in June, and was above the six previous auction average of 2.84. It was also the highest Bid to Cover since November 2015.

The internals were also rather impressive, with Indirects taking down 58.5%, above the 56.6% in June, and above the 6MMA of 54.1%. Directs were awarded 16.9%, down slightly from 18.4% last month and above the 6 month average of 13.7%. Combined these two meant record buyside interest, leaving Dealers with just 24.6% of the auction, down from 25.0% and below the 32.1% 6month average. This was the lowest Dealer award on record.

In other words, if anyone was worried about a surprise announcement by the Fed tomorrow, one which would send 2Y yields spiking, it wasn"t to be found among the bidders for today"s auction.

3-Month Treasury-Bill Auction Prices At Highest Yield Since Lehman On Debt-Ceiling Concerns

It seems Morgan Stanley was right when they said "the debt ceiling worries us most," as today"s 3-month T-Bill auction surprised the market with its highest yield since the fall of 2008, as investors continue to price concerns that the U.S. government will exhaust its borrowing authority around mid-October.

As SMRA details:

The 3-month bill auction stopped at 1.180%, with a 67.70% allocation at the high yield. The 3-month auction bid/cover ratio was 2.87. The average 3-month bid/cover over the past three months was 3.13. The WI was last trading at 1.165% at 11:30 AM. Indirect bidders took down 38.44% of the 3-month bill auction and Direct bidders took down 5.61%.

The 6-month bill auction stopped at 1.130%, with a 34.87% allocation at the high yield. The 6-month auction bid/cover ratio was 2.91. The average 6-month bid/cover over the past three months was 3.30. The WI was last trading at 1.115% at 11:30AM. Indirect bidders took down 40.66% of the 6-month bill auction and Direct bidders took down 2.69%.

So the 3-month bill is priced 5bps cheaper than the 6-month bill and both dramatically tailed.

As BofA noted, the early pricing of debt limit concerns may reflect overhang from this week’s bill auctions and the "greater influence" of government money market funds following October"s reforms.

But, Morgan Stanley recently warned that the biggest immediate risk to the market is:

The debt ceiling worries us most, given that action may need to be taken within as little as seven weeks. But on the other issues, we’re more relaxed. The Senate’s Healthcare bill had an approval rating of 17%, so we doubt its failure would be a hit to consumer confidence. The Special Counsel’s investigation, whatever the outcome, will likely take considerable time. Our economic baseline was already cautious with regard to fiscal stimulus, a long-held view of our policy team. And while tax cuts could boost the market temporarily, they could also lead to a more hawkish Fed, a classic ‘be careful what you wish for.’

As the 3mo6mo yield curve inverts dramatically...

Inflecting right around the mid-October date of today"s auction...

Tailing, Mediocre 30Y Auction Caps Week's Treasury Offerings

One day after a mediocre, tailing 10Y reopening, the Treasury held its last Treasury auction for the week, selling $12 billion in 30Y bonds at a yield of 2.936%, above May"s 2.87% and the highest since 3.050% in May, tailing the When Issued of 2.926% by 1 basis point. This was the 4th tailing 30Y auction in the past 5.

The internals were unremarkable: the bid-to-cover of 2.31 was virtually unchanged from last month"s 2.32, but above the 6 month average of 2.27%. Total bids of $27.9b for $12.3b in bonds sold vs $27.8b in bids for $12.0b in bonds sold at the previous auction

The buyside demand was stable with indirect bidders awarded 61.7% vs previous auction’s 63.7%, and modestly below the MMA of 63.6%. Direct bidders were awarded 6.4% vs 6.7% in June, leaving Primary Dealers with 31.9% of the final aware, just higher than last auction’s 29.6%.

In retrospect, considering the recent volatility in the TSY market coupled with today"s surprise Jackson Hole, end-of-QE "trial balloon" by the ECB, it is perhaps more notable that this week"s three auctions were not more disappointing.