Something Very Strange Is Happening With Treasuries

Seeking Alpha ^ | February 24, 2010 | Graham Summers

[Cheap_Hessian]

There are times in life when one witnesses something so outside the scope of normal experience, that at first you don’t see it.

Captain Cook’s diaries tell us that upon first seeing his ships offshore in Australia, the aborigines expressed “neither surprise nor concern.” Cook notes that it was not until he and his men approached the shore in smaller, more familiar vessels that the villagers reacted, arming themselves as “the sight of men in small boats was comprehensible to them: it meant invasion.”

Well, I had a similar experience during yesterday’s bond auction. Before going into the details, we need to fully explain how a Treasury Auction works.

First the Treasury issues a press release saying just how much debt is being issued (sold) during a given auction. This release also says how much of the Treasuries currently owned by the Federal Reserve are coming due that day, the implication being that the Fed will likely use the funds from their maturing Treasuries to buy some of the new debt issuance.

When it comes time for the auction, investors can either bid non-competitively (meaning they’ll take whatever yield is available based on demand) or competitively (meaning they have a minimum yield requirement and won’t buy the debt if it yields less). Non-compete bids are accepted first. After them comes the competitive bids until the total debt issuance is complete.

So let’s say the Treasury is issuing $10 billion in ten-year notes. On the day of the auction, the lowest competitive bid states it won’t accept anything under a 3% yield. So, the Treasury starts filling non-competitive bids at 3%.

[Cheap_Hessian]

Ping!

[Centurion2000]

I’d be interested to see his primary direct ratios going back several months. Odds are they have been creeping up over time.

[scan59]

Very interesting. I wish I could make an intelligent reply. I will however, be checking back to see what others have to say. Always figured the real troubles would come from the Fed and Treasury dept manipulating things; not from too many people losing their homes.

[chainsaw]

Very interesting. I wish I could make an intelligent reply.

Me too.

[ChildOfThe60s]

It’s a little esoteric to me. The one thing I get out of it is that *someone* bought $30 billion for 0% yield.

So, is it investors that are concerned that the risks out there for any yield are too great? Or is it the FED printing presses running flat out; then using surrogates to buy the Treasuries with this newly printed money?

Starting to sound like a fiscal circle j*rk.

[jdsteel]

IMHO, you are right on the circle j*rk thing. And, yes, it is the Fed sucking up all supply beyond what goes at very low rates. It is vital that they do what they can to keep interest rates low and that they are able to keep issuing debt. Sooner or later (and I don’t think later) the market will force the longer term yields up and all hell will break loose in the bond market for a while. That said, I am in a losing position shorting long US bonds for the last few months.