Back in February, it was a devastatingly ugly 7 Year auction that sparked a powerful selloff across the bond market (driven largely by revulsion from Japanese investors) which then spilled over into all other asset classes. It’s only fitting that in a year when the Fed made a U-turn on its recent monetary policy and when inflation exploded higher, that the last auction of 2021 was i) a 7 year and ii) was almost as ugly as the dismal 7Y.
Moments ago the Treasury sold $56 billion in 7 Year paper which priced at a high yield of 1.480%, which while better than last month’s 1.588% – and in fact just like yesterday’s 5Y auction was the first decline in 7Y yields since July – was a huge, 2.3 bps tail to the 1.457% When Issued. Not only was this the 5th tailing 7Y auction out of the past 6 for a point on the curve that has emerged as the clearest loser to the Fed’s tightening intentions, but this was the biggest tail since March, when the When Issued was 2.5bps lower. That said, it was still quite a ways away from the 4.4bps tail that sparked the February bond market turmoil.
The Bid to Cover of 2.21 was ugly too, and printed the lowest since the infamous February 7Y auction when it was 2.045. By comparison the six-auction average was 2.31.
The internals were mediocre, with Indirectrs taking down 59.3%, unchanged from last month and down modestly from the 60.5% recent average. And with Directs taking down 19.5%, meant Dealers ended up with 21.3%, the most since July.
Unlike this week’s two prior auctions which also tailed but had redeeming “internal” qualities, today’s sale was ugly through and through, and as a result the 10Y yield spiked to session highs of 1.56%, rising more than 1bp on the auction results…
… which also sent the 7Y to the highest on the day.