Forget Greece, The US Almost Had a Failed Treasury Bond Auction

The Market Oracle ^ | 2-12-2010 | Graham Summers

[blam]

Forget Greece, The US Almost Had a Failed Treasury Bond Auction

Interest-Rates / US Bonds
Feb 12, 2010 - 12:53 PM
By: Graham Summers

While most of the investment world focuses on the various ”senior officials” (none of whom seem to have actual names or positions) commenting on whether Greece will or will not be bailed out/ receive an emergency loan/ offered moral support, etc, a far more significant debt story is emerging in the US.

On Wednesday the US offered $16 billion worth of 30-year Treasuries (US debt that will mature in 30 years). Before we get into the details of how much of a disaster the auction was we’re going to do a brief review of how US debt issuances work.

US Debt is issued by the US Treasury. You can bid as much as 30 days in advance of a debt auction. When the auction actually takes place investors can buy directly (Direct Buyers) by buying Treasuries themselves OR they can buy indirectly (Indirect Buyers) by using a Primary Dealer: one of 18 Banks and Securities Brokers who do business directly with the US Federal Reserve Bank of NY and so HAVE to buy Treasuries at auctions to insure liquidity.

Direct buyers buy “off the radar” meaning you cannot track who the buyer is.

If an investor buys indirectly, he or she has to notify the Primary Dealer of his/her intentions in advance. This might sound a bit like showing your hand while playing poker. And it is.
The only reason to go through a Primary Dealer (make an Indirect Purchase) is because you want to buy a sizable load of Treasuries (remember, Primary Dealers have a special relationship with the Fed and so can insure you get the amount you require).

Historically, Foreign Governments (China, Japan, etc) have made up the majority of Treasury purchases. Because of this, the Indirect Buyer purchases are typically thought to represent just how demand Foreign Governments have for US debt.

I realize this sounds complicated so simply think of it this way:

Direct Buyers: folks who buy straight from the Treasury, typically comprising a minor stake in US debt purchases Indirect Buyers: folks who buy LARGE chunks of US debt, typically Foreign Governments Primary Dealers: banks that HAVE to buy US debt to insure an auction doesn’t fail.
You don’t want to see a lot of Primary Dealer purchases as this means that those who can CHOOSE to buy US debt DON’T want to. On Wednesday, February 10 2010, the US Treasury issued $16 billion in 30-year Treasuries. Here are the buyer data points:

Buyer Purchase Amount (%) Primary Dealers 47% Direct Buyers 24% (A RECORD) Indirect Buyers 28%

First of all, we see Direct Buyers hit a RECORD percentage of purchases. This is extremely bizarre and somewhat disconcerting given that we have no way of know who these buyers are. For all we know they could be the Federal Reserve itself or other US-Government entities buying “off the radar.”

Indeed, on that note we know that the US Federal Reserve accounted for 11% of the total purchases. Folks, you’re not dealing with a healthy debt auction when the Fed accounts for 10% of purchases.

However, far, FAR more worrisome is the pathetic Indirect Buyer takedown: 28%. Historically this number has been more around 40% (Tyler at ZeroHedge notes that the average Indirect purchase of the last four long-term Treasury auctions was 39.9%).
To see such a MASSIVE drop off in Indirect Buyers (40% down to 28%) is a MAJOR warning sign that Foreign Governments are no longer willing to buy long-term US debt.

This auction was a very small step away from a failed auction. To see Primary Dealers buying so much (remember they HAVE to buy it) and Indirect Buyers so little, only confirms what I’ve been saying for months, that the US is entering a Debt Spiral: a situation in which it must issue more and more debt (while rolling over trillions of old debt) at the very time that fewer and fewer investors are willing to lend to the US for any lengthy period of time (more than ten years).

Folks, forget Greece, the US has its own debt problems. And they’re MAJOR. The fact that stocks RALLIED on this news tells you how disconnected stocks are from reality.
The Debt Spiral has started and is now accelerating. It’s only a matter of time before it becomes a full-fledged Crisis. And this one will make 2008 look like a cakewalk.

[The Sons of Liberty]

the US has its own debt problems

Yet 0bamao and congress are spending faster that an entire fleet of drunken sailors ever could, on anything and everything.

[colorado tanker]

This scandal needs telling right now. If you look at Zero's own projections the U.S. will be hitting Greece's numbers in two years time or less, that is a national debt over 100% of GDP and an annual deficit over 10% GDP. And that's without passing health care and cap and tax. ObamaReidPelosi are driving the economy off the cliff if we don't stop them right now.

And don't buy the Bush's fault B.S. Dubya's biggest annual deficit was less than 3.5% GDP and the total debt was 70% of GDP in 2008. Debt has not been over 100% of GDP since WWII.

[JasonC]

This is nonsense. The most recent treasury auctions were oversubscribed 2.6 times. That is for the long maturities. For t-bills, yielding essentially nothing, they are routinely coming in 4.5 times oversubscribed.

The same chorus has been predicting an epic bear in treasuries and epic inflation for about the last five years. Meanwhile we remain in a deflation, not an inflation, and both real rates and inflation expectations (as seen in TIPS) have been crushed.

[101voodoo]

"For all we know they could be the Federal Reserve itself or other US-Government entities buying “off the radar.”

I believe this is exactly what is happening.

[blam]

30 Year Auction: A Solid "F"

There's no other way to describe this:

Bad. Actually, let's go worse than bad and call it what it is - by any definition this is just one step off from "Failed."

Yield was way over where it was trading at the time, as you can see here:

The more-worrying factor here is that we've got this "mystery" direct buyers out here again taking nearly 25% of the offered amount (who is bidding for that undisclosed?) and another 11% taken down by The Fed for the SOMA account.

Yet even with this Treasury had to pay up to get it to go and the bid-to-cover was anemic at best.

Given the Primary Dealer system we have in this country, any BTC under 2.0 is an effective fail. To get an auction that behaves in this sort of fashion, complete with mystery direct bidders and heavy SOMA (Fed) participation, yet Treasury has to pay up in the form of a significantly higher coupon is not a good sign at all.

Remember folks, this sort of issuance isn't a local event. It will continue through the year, as we are on track to run record budget deficits, so the premise that "it will all be ok and this won't start a ratchet up of rates on the long end" is perhaps more than a bit fanciful.

Rick Santelli gave the auction an "F" and I agree - there's simply no possible way to read this as anything positive at all, and that the equity market is ignoring it (other than a quick, small spike downward on the release) likely has more to do with how tightly equities have become coupled to the dollar in the last couple of weeks than anything else.

[101voodoo]

What can I say, The Administration and all who surround them are not to be trusted. There are no words to describe the slime factor of these morons.

[Freedom_Is_Not_Free]

Scary stuff.

[Nateman]

Any buyer of US debt should realize Congress cheated in order to raise the debt limit.

This is Paul Kirk. If you are an American he ripped you off for over $6000. Paul Kirk was the temporary Senator for Massachusetts. He became the senator , illegally, because the law was changed, ex-post facto , to let the Governor rather than the people of Massachusetts select him. Even After Scott Brown won Paul Kirk continued to vote in the Senate, doubly illegal now because Kirk should have lost his vote after that election. Paul Kirk voted along with 59 other RATS on January 28 to rise the debt limit 1.9 Trillion dollars. A vote that would have failed without him. If dollars bills were laid end to end starting from the sun this would go past the orbit of Mars. That is $6258 for every man woman and child in America. Perhaps the largest theft in the history of man and it has attracted no more attention then a local car wreck.

Speaking of wrecks, this may be the final blow that plunges America into bankruptcy. Needless to say this will cripple America's ability to defend itself and allow all kinds of evil now laying in wait to wreck havoc upon the world. Congratulations Thiefsenator Paul, the new decade was only 28 days old and you have perhaps succeeded in becoming one of its most evil men.

[Nateman]

Any buyer of US debt should realize Congress cheated in order to raise the debt limit.

This is Paul Kirk. If you are an American he ripped you off for over $6000. Paul Kirk was the temporary Senator for Massachusetts. He became the senator , illegally, because the law was changed, ex-post facto , to let the Governor rather than the people of Massachusetts select him. Even After Scott Brown won Paul Kirk continued to vote in the Senate, doubly illegal now because Kirk should have lost his vote after that election. Paul Kirk voted along with 59 other RATS on January 28 to rise the debt limit 1.9 Trillion dollars. A vote that would have failed without him. If dollars bills were laid end to end starting from the sun this would go past the orbit of Mars. That is $6258 for every man woman and child in America. Perhaps the largest theft in the history of man and it has attracted no more attention then a local car wreck.

Speaking of wrecks, this may be the final blow that plunges America into bankruptcy. Needless to say this will cripple America's ability to defend itself and allow all kinds of evil now laying in wait to wreck havoc upon the world. Congratulations Thiefsenator Paul, the new decade was only 28 days old and you have perhaps succeeded in becoming one of its most evil men.

[bd476]

Bump.

[NativeNewYorker]

I've been involved in treasury auctions for 28 years. This was NOT repeat NOT a failed auction. It was slightly weaker than the recent norm, which is hardly surprising given the volume of paper the Messiah PBUH is demanding the market absorb.

A failed auction...a real one...would get your attention because stocks would fall 300 points within seconds of the results being posted....before falling whatever the exchange limit is that day.

There's lots to be worried about, but this reporting just BS.

[broken_arrow1]

Ping4later

[CPT Clay]

When is the next 30 year auction?

[FromLori]

http://market-ticker.denninger.net/archives/1959-30-Year-Auction-A-Solid-F.html

[blam]

Thanks.

See post #6.

[GOPJ]

Ummm, aren’t we “buying” some of our own debt?

[Danae]

I was actually expecting worse... like about 39%. But still, this is BAD. The next one will be WORSE.

Inflation HERE WE COME.... alternatively, HOW DO I GET OFF THIS RIDE??? Oh there is no way off?

Crap.

[Danae]

Thats how we print more money to inject it into the economy and incidentally pay off the HUGE interest payments that are just about to start hitting.

[Cacique]

Question; If they’re buying our debt, who is buying theirs?