One look at the repo market ahead of today's $26 billion auction of 2Y paper explains why with the When Issued trading at 1.235% at 1pm, the auction stopped through by 0.5 bps, printing at 1.230% - the reason was familiar: with the OTR issue trading negative in repo, it suggested there were quite high odds of a squeeze into the auction, and the headline print confirmed as much.

Two-year note auctions had stopped through their respective 1:00 PM bid sides by an average of 0.3 basis points over the prior year and 0.2 basis points over the prior six months. The 2-year note auctions had an average bid/cover of 2.69 over the prior year and 2.64 over the prior six months,

As for the internals, there was little of note, with the Bid to Cover rising modestly from 2.682 in January to 2.819, above the 6MMA of 2.64. This was the highest bid to cover going back to August of 2016.

But more surprising than the overall strong bid, was the takedown by Directs, who ended up with 20% of the allotment, also the highest since August of 2015, and with Indirects taking roughly the same as last month, or 49.8% compared to 48.8% a month ago, it meant that Dealers ended up with only 30.1%, the lowest Dealer allocation going back also to August 2016.

Overall, another strong auction with a surprising uptake in Directs, which traditionally indicate local pension and bond-focused funds.