Image Source: Pixabay

After a disappointing, subpar, tailing 2Y auction started off the last coupon week of the year, moments ago we got the week's second auction, a $70BN sale of 5Y paper which was also disappointing.

The auction stopped at a high yield of 3.747%, up from 3.557% in November and the highest since July. It also tailed the When Issued 3.7146 by 0.1bps. This was the 6th tail in the past 7 auctions.

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The bid to cover dropped to 2.35 from 2.41 last month; thie was the lost since September and also below the recent average of 2.36.

The internals were also soft, especially at the Indirects: foreign buyers took down just 59.5%, the lowest since September and well below the recent average of 61.8%. The trend is clearly not the 5Y tenor's friend. 

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But it was Directs who saved the day: awarded 31.7%, this was the highest on record.

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As a result, dealers were left holding 8.8%, tied for the lowest on record.

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Overall, this was an ugly, tailing 5Y auction but it could have been even worse had Directs not stepped up. Or maybe they did just because they know that in a few more months the Fed will expand its universe of QE purchases from Bill-2Y all the way to 5Y... and beyond, as Powell gradually shifts to the endgame, which as readers know well, is nothing less than Yield Curve Control.

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