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.

China Bonds, Stocks, Commodities Extend Gains As Yuan Tumbles To One-Month Lows After Renewed Liquidity Injection

As China got back to work after Golden Week, it appeared a renewed exuberance appeared in every orifice of liquidity provision (even as PBOC sucked up excess for 6 straight days). Stocks are up, bonds are up, and commodities are soaring (all as Yuan tumbles) and tonight authorities unleashed 100bn reverse-repo (for the first time in 7 days) as leverage seems nothing to worry about again yields drop and asset prices rise.

As Bloomberg reports, China’s central bank restarted the use of an instrument that adds cash to the financial system, helping ease liquidity concerns before $153 billion of funds come due this week.

The monetary authority sold a total 100 billion yuan ($14.5 billion) of reverse-repurchase agreements, the first auction after a six-day pause, a statement posted on its website showed. While the open-market operations resulted in a net withdrawal of 90 billion yuan because of maturing contracts, the resumption signals that policy makers don’t want a sudden tightening of money supply, according to Bank of Tokyo-Mitsubishi UFJ (China) Ltd. The People’s Bank of China last week allowed 625 billion yuan of reverse repos to mature, mopping up cash after adding record funds in the days before the week-long Lunar New Year holidays. Some 900 billion yuan of the contracts are set to mature this week, as well as 151.5 billion yuan of loans under the Medium-term Lending Facility, data compiled by Bloomberg show. That adds up to 1.05 trillion yuan, or $153 billion.

“The PBOC restarted the use of reverse repos to stabilize market sentiment because large maturities are on the way,” said Li Liuyang, a Shanghai-based market analyst at Bank of Tokyo-Mitsubishi UFJ (China).

“The net result will probably continue to be a withdrawal this week, but the pace will be controlled to avoid any crunch. We also expect it to conduct MLF, given the maturities.”

And Lo and Behold - China soars...so much for all that worry about Trump trade wars!!

Stocks are up...

Bonds are up...

And every industrial commodity is exploding higher...

And all of this as the Yuan tumbles in a Trump-infuriating way... dropping to 5-week lows

Chinese Interbank Lending Freezes; Government Bond Trading Halted After Massive PBOC Liquidity Drain

Earlier today, we were surprised to note that having aggressively drained liquidity from the interbank funding market, on the first trading day of 2017, the PBOC not only fixed the Yuan well lower (sy 6.9498 vs 6.9370 on the last day of 2016, even if this was well stronger than the Offshore Yuan), but the People"s Bank of China withdrew even more liquidity. It did that by injecting CNY20 billion via 7-day reverse repos and another CNY20 billion via 14-day reverse repos in its open-market operations Tuesday, according to traders, while continuing to skip 28-day reverse repos.

The move resulted in a net drain of CNY155 billion for the day, and followed a substantial drain of a net CNY245 billion last week - the first removal of liquidity in three weeks. We promptly followed up with a warning:

PBOC drains a net CNY155 billion for the day. Keep an eye on overnight SHIBOR/ HIBOR/ Repo

— zerohedge (@zerohedge) January 3, 2017

Just over an hour later, it appears our warning was warranted, because according to the latest daily fixing of the Treasury Market Association, as a result of the PBOC"s massive liquidity drain which soaked up a nearly a third of a trillion Yuan in the past two weeks, the interbank market is freezing again as follows:

• 1-month yuan interbank rate in Hong Kong rises 1.16ppts to 13.01%,


• 3-month CNH Hibor +89bps to 10.02%;

Most importantly, the overnight CNH Hibor rate soared 4.95% to 17.76%, the highest since September, andconfirming of yet another daily freeze in interbank lending simply so that the PBOC can punish all those who are still short the Yuan. 

The good news: at least the UCDCNH tumbled by as much as 200 pips on the session. The bad news, it is unclear how much more of this daily volatile punishment Chinese and Hong Kong banks can take.

But wait, because the interbank freeze was not all, and in a repeat of two weeks ago when China"s halted the trading of its government bond future, the Shanghai Stock Exchange announced that Shanghai halted trading of the 3.99% government bond due May 2065 after "abnormal fluctuations."  It was not exactly clear what that particular phrase meant aside from "aggressive selling" as per the chart below.

According to a statement, trading was set to resume at 11:06 am after being halted at 10:36am, but not before the exchange called on investors to "remain rational and reminded them of trading risks." In other words, please don"t sell, especially when the central bank just yanked a near record amount of liquidity from the market.