Treasury 2-year auction preview: the auction will test the bond market's mettle
Treasury 2-year auction preview: the auction will test the bond market's mettle for short term government paper. There are a number of challenges, the least of which is the $40 B in size, the largest since mid-2010. Additionally, there's some $280 B in bills and coupons still ahead. Also, the wi yield is marginally richer on the day at 2.610%. A stop there would be the lowest since June. The note is modestly attractive on the curve. But, it's trading close to general collateral in the repo market, suggesting a limited short covering bid. Month-end could come into play, but more likely for the 7-year auction. Indirect bidding should remain decent however, given yield differential as many short dated sovereigns still trade in negative territory and ECB and BoJ policies look to remain accommodative. The 2-year offers a near 300 bp pick up to the German Schatz. The December auction was sub-par, likely a function of holiday conditions. The note stopped at 2.619% and garnered a 2.31 cover (2.79 average) and a 45.0% indirect bid (45.3% average). Direct bidders took 7.8%.