Sloppy, Tailing 20Y Auction Validates Duration Fears

After last week's mini-taper of 20Y POMOs by the Fed, the market was closely watching today's auction of $27BN in 20Y bonds for signs of weakness, especially after this morning's dismal 2Y bund auction in Germany which saw the weakest demand since July 2019, and they were not disappointed (or rather, they were).

As a reminder, on May 13 the Fed altered the way it divides up the maturity buckets for its planned POMO operations, spooking some traders into seeing a mini-taper starting for the long end.

The results of today's sale which came one year after the first 20Y auction was launched back in 2020 showed that demand indeed pulled back, with the high yield coming in at 2.286%, just shy of the tenor high hit in March when it priced at 2.29% and tailing the When Issued 2.286% by 1bp, the first 20Y tail since February.

The bid to cover of 2.24 was also disappointing, dropping sharply from last month's 2.42 and the lowest since February's 2.15.

Internals were likewise disappointing, with Indirects dropping to 56.7%, well below the 58.7% in April and 6-auction average, and with heavy Directs demand - taking down 19.5% or the second highest in recent 20Y history - Dealers were left holding 23.8% of the auction, just below the 24.5% recent average.

(Click on image to enlarge)

Overall, a sloppy ugly auction amid mini-taper fears, although it could certainly have been far uglier as today's generally risk-off tone certainly helped boost demand.

For those who missed it, this is what the Fed said last Thursday:

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