All Treasury auctions stopped through this week across the 2, 5, and 7 year auctions. People are saying that dealers lost because dealers typically short then when-issued bond and cover at the auctions. If it stops through (high yield is less than when-issued yield) then dealers have to cover their short at a higher price.

I don't quite understand this logic. Assume for example that the dealer shorts the when issued bond at a yield of 1.5% in the morning. Yields rise throughout the day heading into 1 PM to 1.7% before the bidding deadline. The clearing/stopping yield was a 1.69% which suggests that the auction stopped through 1 basis point. So even though it stopped through, wouldn't the dealer still make out since they shorted at 1.5% and covered at 1.69%.


Sure, in that situation the dealers would win. However it’s not a very realistic scenario. More commonly, dealers would set up short much closer to 1pm, in which case their entry price is around 1.70. Hence they would lose if the auction settled at 1.69.

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  • $\begingroup$ Thanks, this makes sense. I guess I don't have a more practical view of how dealers set up. $\endgroup$ – VanillaCall Oct 27 '19 at 15:59

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