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Something Very Strange Is Happening With Treasuries

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February 25, 2010 – Comments (4)

Here is a fantastic seekingalpha article by Graham Summers. Read the whole article, it is definitely worth it. Here is a very interesting passage below

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Something Very Strange Is Happening With Treasuries
Graham Summers

[excerpt]

....Roughly, 27% of the auction took place at the highest rate. This means nearly one third of the demand from competitive bidders (those who care about yield) came at the HIGHEST yield that was accepted. In plain terms, this alone tells you that investors want higher yields from Treasuries since nearly a full third of the debt issuance took place at the highest REQUIRED yield.

As you would expect, there were few non-competitive bids (who in their right mind is willing to buy US debt without caring about the yield?): non-competes only made up less than 1% of the bids. In contrast competitive bids made up 97% of the demand.

Now here’s where things get odd.

Of the competitive bids (meaning those bids coming from folks who care about yield), roughly 70% went to Primary Dealers (investors who HAVE to buy the debt and who usually turn around and try to sell it afterwards). To put this number into perspective here is the percentage of competitive purchases made by Primary Dealers in the last four 4-week Treasury issuances:

You’ll note that during the stock market correction that took place during the end of January/ beginning of February, Primary Dealers didn’t need to buy many Treasuries since investors were fleeing stocks and buying short-term Treasury debt as a safe haven.

You’ll also notice that yesterday’s auction featured MORE buys from Primary Dealers than almost any of those occurring in 2010. Remember, Primary Dealers HAVE to buy Treasuries. So to see them buying a high percentage of Treasuries at debt auctions means that few investors who can pick and choose what to buy are actually looking to buy US debt.

In plain terms, a debt auction that features a high percentage of competitive buys coming from Primary Dealers is BAD NEWS. It means investors generally aren’t buying US debt. It also means that foreign governments (those who have funded US debt auctions for decades) aren’t buying much anymore either.

So the fact we’ve have three short-term auctions in which more than two thirds of competitive buys came from Primary Dealers is worrisome to see the least.

Now here’s where it gets even worse.

Of the remaining competitive buys (about $8.86 billion), only 32% came from Direct Bidders or those who bought debt directly from the Treasury: orders that can easily be tracked. The other 68% ($5.9 billion) came from Indirect Bidders: folks who we cannot track.

Even more bizarre, only $5.9 billion in Indirect Bidder competitive buys were ACTUALLY OFFERED. So we had a 100% acceptance rate for Indirect Bidder competitive buys.

Let’s put this in perspective:

This means that the Treasury took up EVERY single cent of competitive bids coming from indirect buyers. Remember, indirect buyers are usually assumed to be foreign governments (even the Treasury website admits this).

If this was the case yesterday, then foreign governments barely bought much of anything in yesterday’s auction (only 19% of total debt issued). Moreover, it implies that Primary Dealers (those having to buy) had to gorge on the auction to make up for the fact that few if any foreign governments are interested in buying our debt anymore (including even short-term debt).

Or…

One could potentially argue that this indirect buying came from the Fed covertly buying under the guise of an indirect bidder (the Treasury recently changed the definition of what qualifies for an indirect bidder to make it more vague). It IS rather odd that every single cent of competitive bidding coming from indirect buyers was filled. It’s almost as if the indirect buyers knew precisely WHAT yield to accept… OR were simply trying to take up the slack in what was already a VERY weak auction. ...

[my comment: Either way (conspiracy theory or not) this is very bad news for the US soverign debt market]

READ FULL ARTICLE..

4 Comments – Post Your Own

#1) On February 25, 2010 at 9:52 PM, dbjella (< 20) wrote:

I try not to be conspiracist, but I have wondered for a long time who would be willing to fund our debt?  I hear newspeople say it is the Chinese, Japanese, Big Banks, Europeans that buy most of this debt, but I wonder?

What if our Federal Reserves works with other central banks to purchase each other countries debt when the demand falls short in the public sector?

Or

What if our Federal Reserve allows GIANT banks free loans only if they buy US treasuries......

I wonder.......

What I can't understand is where all this borrowing is going to lead.  I was afraid when it started under Reagan.  I was even afraid when we had a surplus under Clinton, because I never saw any curtailment in Gov't spending.  As soon as tax revenues started heading south I knew we would be in an interesting conundrum.  Do we let everything reset, experience tremendous pain and rebuild or do we prevent a reset via heavy debt and money expansion all of which I am not sure what is the end result, but it can't be good :(

 

 

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#2) On February 26, 2010 at 8:57 AM, binve (< 20) wrote:

dbjella,

I try not to be conspiracist, but I have wondered for a long time who would be willing to fund our debt?  I hear newspeople say it is the Chinese, Japanese, Big Banks, Europeans that buy most of this debt, but I wonder?

I agree. Based on the size of the defecits we are running, and the fact that just as many countries are in as bad shape as us, I find the whole "increased demand from indirect bidders"  extremely fishy as well.

What I can't understand is where all this borrowing is going to lead.  I was afraid when it started under Reagan.  I was even afraid when we had a surplus under Clinton, because I never saw any curtailment in Gov't spending.  As soon as tax revenues started heading south I knew we would be in an interesting conundrum.  Do we let everything reset, experience tremendous pain and rebuild or do we prevent a reset via heavy debt and money expansion all of which I am not sure what is the end result, but it can't be good :(

I totally agree.

I have hear all of the intellectual / academic arguments for perpetual debt growth being justifiable, just like Krugman, Blanchard, the IMF, the Fed, etc all maintaing that "just enough" inflation is okay / controllable. I call BS. Not only because I think it is a fallacious policy, but especially because those who are running it don't seem to know what they are doing.

Thanks for the comment!.

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#3) On March 02, 2010 at 3:34 PM, ElCid16 (95.85) wrote:

Binve, 

Speaking of "controllable inflation," I recently read an article out of The Economist highlighting the IMF chief economist's suggestion that central bank inflation targets be increased an additional 2% from the norm.  He believes that this would provide additional flexibility going into the next recession...

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=347410&t=01003458984598483929

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#4) On March 02, 2010 at 5:42 PM, binve (< 20) wrote:

dkilgour16,

Yeah! The statments by Oliver Blanchard! LOL!. I read the Economist too and that whole statement / paper from the IMF just read like horse sh**. 2% ... hmm, that's okay. But you know what? 4% would be even *more* okay ... LOL!.

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