Primary Dealers Violently Expel Just Auctioned Off Three Year Bond, As Fed Monetizes

ZeroHedge ^ | 2/28/2011 | Tyler Durden

[FromLori]

Over Half PD Holdings In Under Two Weeks

Today's POMO closed with the Fed monetizing its usual fare of $6.69 billion in various 3 Year bonds, at a 5.81 Submitted-Accepted ratio. The surge in the S/A ratio is not surprising: a quick look at the internals shows just what the reason for the Primary Dealers' urgency was. Of the entire POMO, one CUSIP: the just auctioned off QH6 3 Year which was sold by the Treasury not even 2 weeks s. Of the entire POMO, one CUSIP: the just auctioned off QH6 3 Year which was sold by the Treasury not even 2 weeks ago represented a whopping 81.1% of the operation. Observant readers will recall that this was the Cusip that was massively monetized ten days ago, when $5.3 billion of QH6 was purchased by the Fed. In other words, in under two weeks, the Primary Dealers have flipped over 50% of their original take down of the auction, or $19,890,840,000! In other words, had the Primary Dealers indicated their true interest in the bond, not accounting for expectations of an immediate flip back to the Fed, the auction would have been a failure. In this way, the the Fed has now monetized 33.5% of the 3 Year that was sold to the unwitting public and foreign banks Luckily, there is a 35% SOMA limit on Treasury holdings. Oh wait, that was scrapped as part of QE2.

Today's POMO summary: note the highlighted QH6 monetization.

And compare it to that from the last 3 Year POMO as of February 18:

[Robert A Cook PE]

That story is extremely cryptic; the excessive insider jargon needs to be translated for those of your readers who are interested in the markets and future bond price changes - but who do not trade every hour of every day.

Worse, the original writer did not attempt to make his train of thoughts clear - while being careful to change fonts and bold typefaces as often as possible. 8<(

[NVDave]

Tell me how much of the lingo you don’t get and I’ll try to translate.

Bond traders indeed do use their own lingo. They exist in a universe all their own... but they’re the biggest gorillas in markets in general, so they can jabber any which way they like, because of the Rule of Gold: He who has the gold makes the rules.

[FromLori]

Would you mind giving a simple explanation then please if you think it helps, I’m absolutely horrible at putting those things in words.

[goat granny]

agree with poster # 2. The whole thing is giberish to the outsider. I usually can click on a post I don’t understand and some freeper makes it understandable. Guess not in this case. sorry...

[spokeshave]

Cliff’s Notes ping

[joelt]

here is my take; Someone bought a bunch of bonds as a favor to the regime to prevent a failed bond auction. The deal was that they would hold them for a bit, then sell. Big Ben over at the fed then bought them on the resale. When the bond auctions start to fail consistently, the interest rates will start spiking and the larger public will see we are screwed. The experts already know we are screwed; but they are not generally telling it straight.... Just my opinion,,, hope some are helped.

[Toddsterpatriot]

Dave, I was wondering what you thought would be easier. Buying huge chunks of Treasuries soon after the auction, before the Primary Dealers have distributed them, or waiting until they have to buy in dribs and drabs old bonds from much older auctions?
Thanks.

[FromLori]

Thank you!

[AAABEST]

Cliff’s Notes ping...

Bottom line - bond auctions are failing because investors would rather put their money elsewhere than in U.S. bonds. In order to entice them to buy, we'll have to pay them a higher rate.

What this boils down to is that the cost of money is going up. IOW, it seems that in addition to inflation, higher interest rates are on the horizon.

I expect either Carter II or even Carter II on a roid rage.

[almcbean]

I think it says Paul McCartney is dead. (and something about a walrus)

[ImpBill]

I think your latter assessment is correct. This “malaise” is going to be far worse that Jimmah’s!

[familyop]

"That story is extremely cryptic; the excessive insider jargon needs to be translated..."

Agreed. Expanding the acronyms and abbreviations doesn't help much, either. For example, POMO is an acronym for permanent open market operations. Here's one definition that might get one started in understanding.

[GOPJ]

I think it means bonds were bought with the idea of a quick flip - and that the true amount of sold bonds was small. So small that the sale was a failure in reality - but on paper looked OK. If this is correct, we have a major problem. NVDave is the only one who would know for sure - and he hasn't posted an explanation yet... we'll have to wait.

[NVDave]

Not ignoring you, we lost our p2p wireless isp link Monday afternoon and it isn’t back up yet. Posting from these “smartphones” is for the kids. I haven’t the patience for this “texting revolution,” I’m afraid.

[NVDave]

Per my reply above to Toddster, my reply is delayed by ISP issues.

I cannot begin to fully explain how infuriating it is trying to write anything with technical acronyms on the Droid phone. Their predictive guessing of words in their “Swype” interface sometimes has me almost to the point of testing my wireless carrier’s phone replacement insurance.

[GOPJ]

Their predictive guessing of words in their “Swype” interface sometimes has me almost to the point of testing my wireless carrier’s phone replacement insurance.

LOL - it took me a few seconds to realize you were talking about destroying that Droid... good one NV. I'll cheerfully wait for you to explain what this is all about until your ISP is up and running. That Droid might be infuriating - but it's the last connection we have with you ... so keep it safe.

[joelt]

The fed has been buying all along in QE2. Some feel they they are buying on the resale end to conceal the magnitude of the feds involvement. I’m no expert by any stretch. But I have money in play as I approach retirement; trying not to get run over or stomped out;

[Toddsterpatriot]

Back on line yet?

[NVDave]

OK, I’m back. Took several days for the ISP to repair the equipment up the tower. They got it going by late Thursday, been busy for the last 48 hrs or so. I could bore you with my theories on why consumer-grade equipment isn’t well suited for the temperature swings in Wyoming, but I shan’t.

Anyway, lemme understand where you’re going with this, if I may:

You want to buy “huge” Can you define that a bit better? What do you mean by “huge chunks” of Treasury paper? In this market, I take that to mean a lot more than 99.99999% of retail investors will buy, via what I’m presuming is a competitive bid, directly from the US Treasury, right?

If you’re going to buy directly from the Treasury on a competitive bid, what is your projected holding time?

And if you’re doing this, there’s another catch - anyone can set up an individual account with the Treasury via TreasuryDirect.com, ie,

http://www.treasurydirect.gov/indiv/products/prod_auctions_glance.htm

and put in a competitive bid, trying to do better than the primary dealers and the off-the-run sales of existing Treasury paper.

That’s OK.... but... how are you going to sell the bonds once you have them? TreasuryDirect, so far as I can see, doesn’t offer you a way to sell the bonds once you own them. Buy new, roll maturing paper, plow your IRS tax return into bonds, all very nicely... but sell them? Not that I can see, unless something has changed since I examined setting up a TreasuryDirect account.

One more thing, if I might be so bold as to expound a bit further: If one were able to get a better yield on Treasury debt by buying directly in a competitive auction process in general, I don’t think that this is the overall macro environment to be buying “huge chunks” of Treasury paper.