Treasury Primary Dealers Under Pressure?

This week, the US Treasury Department is set to auction $157 billion worth of Treasury securities. There seems to be an increasing angst in the market: who is going to buy all these debts and how?

Primary Dealers are the banks, both US and foreign, who are required to bid at Treasury auctions. The current Primary Dealers, as released by the New York Fed, are as follows:

• BNP Paribas Securities Corp.
• Banc of America Securities LLC
• Barclays Capital Inc.
• Cantor Fitzgerald & Co.
• Citigroup Global Markets Inc.
• Credit Suisse Securities (USA) LLC
• Daiwa Securities America Inc.
• Deutsche Bank Securities Inc.
• Dresdner Kleinwort Securities LLC
• Goldman, Sachs & Co.
• HSBC Securities (USA) Inc.
• J. P. Morgan Securities Inc.
• Mizuho Securities USA Inc.
• Morgan Stanley & Co. Incorporated
• RBS Securities Inc.
• UBS Securities LLC.

In addition to weekly auctions of various Treasury bills (4 to 52-week), longer-term Treasury notes and bonds are sold every 2 weeks. 3-year note, 10-year note and 30-year bond are usually sold in the same week, so are 2-year note, 5-year note and 7-year note. This week, it is 3-year, 10-year, 30-year combo.

Just to give you an idea of how much debt is being issued, take 3-year note as an example:

In 2009, 5 auctions have been completed; there are 7 more to go. Each auction sells between $32 to 35 billion worth of 3-year note. So, by the end of this year Treasury will have sold between $384 and 420 billion. In 2008 there were two 3-year note auctions that sold $53 billion total.

How about 5-year note?

Treasury auctions 5-year note every month. This year, the size of each auction is well over $30 billion. In 2008, it was between $15 and 28 billion. In 2007 it was between $14 and 16 billion. In two years, the size of each auction doubled.

Or 7-year note, which is offered for the first time this year:

So far this year 4 auctions have been completed, with each auction selling $26 billion. There are at least 5 more auctions scheduled.

Or 10-year note:

Treasury is set to auction 10-year note every month this year. 10-year note was auctioned every month also in 2008, but prior to 2008 it was auctioned only 8 times a year. This year's auction size is between $16 and 22 billion. In 2008 it was between $10 and 20 billion. In 2006 it was between $9 and 15 billion. In 2000, there were only 4 auctions, in which $46 billion total was auctioned.

In May alone, Treasury auctioned $172 billion worth of Treasury note and bond. $172 billion times 12 months equals $2 trillion. And this is not counting Treasury bills (4-week, 13-week, 26-week sold every week - about $30 billion each, 52-week once a month, about $25 billion).

So who has the money to buy all these debts? Or who wants to buy them? Foreigners are dropping out of longer-dated Treasuries. Will the primary dealers be able to continue buying them and selling to someone else, without becoming insolvent themselves? (Some say these banks are already insolvent.) Or will we start to see the primary dealers refuse to buy Treasuries? The Federal Reserve's $300 billion pledge to purchase Treasuries over the 6-month period (starting March) won't be anywhere near sufficient, I'm afraid.

Tweet