Why *Only* That Specific One?

On February 23, the US Treasury sold off $60 billion and change of 2-year notes (CUSIP 91282CBN0). This particular shorter-term instrument has been in the crosshairs of the reflation trade, lurching in and out of it going back to last October, perhaps even late September. Caught up being the immediate tenor following the bills which have been bid (for “some” reason) and longer-term notes and bonds which are more reflation sensitive, the yield on the 2s has been yo-yoing back and forth between 10 bps and as much as 19 bp for more than half a year.

Notwithstanding such volatility, and with reflation having ignited more completely since early January, Janet Yellen’s Department had no trouble whatsoever floating the allotment. For the $60 billion offered, $146.3 billion in bids came in producing a high auction award of 11.9 bps yield (media 9.8 bps) given a secondary market pricing of 11 bps (and change) for five days running beforehand.

That worked out to an uninteresting, uncontroversial bid-to-cover ratio of 2.44, well within the established trend going back to December 2019. For that reason, along with the less reflation-y view of the world taken from the proximity to bill yields, the auction parameters for these 2s were records (low yields).

Two days later, the secondary market price for 2s suddenly plummeted; the yield spiking from around 11 bps to a touch higher than 17 bps on the 25th.

It wasn’t just the 2-year notes which fell under broad selling discretion; the entire Treasury market from just beyond the bills to the long bond suffered a material dislocation that, of course, triggered the usual finger pointing. It had to have been reflation, a growing mainstream premise that even bonds can no longer deny how governments and central banks shifted risks in an entirely new direction toward perhaps having committed “too much.”

Possibly, but why hadn’t that view been expressed just two days before when those brand-new 2-year notes issued under such high demand?

The obvious blame fell on the 7-year note which unlike its counterpart closer to bills had suffered a “terrible” auction on the 25th – the day of the selloff. The numbers do appear to back up the description: the high accepted yield was 1.195%, way, way above the 1.02% recorded by Treasury for the secondary market close the day before (Feb 24). More than that, with $62 billion being offered Treasury received “only” $126.8 billion in private bids.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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