30-Year Treasury Bond Auction Today

was what the stock market had been waiting anxiously today. The results are in, and they are rather ugly.

Amount auctioned: $16 billion, original issue.
Primary Dealer: $8.11 billion (50.7%)
Direct Bidder: $1.72 billion (10.8%)
Indirect Bidder: $6.13 billion (38.35%)
Bid to Cover Ratio: 2.31 (last month: 2.49; last original issue in August: 2.77)
Interest Rate: 4.250% (last original issue in August: 3.875%)
High Yield: 4.320% (allotted at high: 82.04%) (last month high yield: 3.852%)

The market reaction? Non-event. The 30-year bond yield spiked RIGHT BEFORE the release of the result (I was waiting at the Treasury's website), but it soon backed down to what it had been trading, as you can see in the chart of TYX (30-year bond rate) below:

Someone made a good money in a matter of 15 minutes or so...

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Treasury Auction This Week

I just noticed a minor anomaly: schedule.

The US Treasury Department usually does not auction longer dated bills and bonds on Monday. But it did today, auctioning 3-year note at a record-low yield.

10-year note, which is normally auctioned on a Wednesday once a month, will be auctioned tomorrow Tuesday. 30-year bond, which is normally auctioned on a Thursday once a month, will be auctioned on Wednesday. No auction is scheduled for Thursday.

Just curious why.

For details, visit my Treasury Auction Watch blog later. (I'm updating with the results now...)

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US Treasuries 'Safe Haven'? Not the Short-Term Bills

With the stock markets around the world diving last week, you would think the investors had gone to grab liquid Treasury bills, right?

Wrong.

Looking at the last week's auction result, Treasury bills were out of favor, even if the rates were higher. 4-week bill result was lackluster to say the least: bid to cover ratio was only 3.72 (4-week bill's bid to cover is usually well over 4), and the Treasury had to give a higher rate on 4-week bill than on 56-day CMB (Cash Management Bill).

Short-term Treasury bills have been under pressure for some time. Higher rates, lower bid to call ratio, and the increasing percentage of direct bidders.

Borrowing short-term fund and spend (invest) in longer-term projects - oh wait, wasn't that what destroyed Bear Stearns and Lehman Brothers when the short-term fund dried up?

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Treasury Issuing Increasing Amount of Bills

Remember Timmy Geithner's announcement a few days ago that his government doesn't need as much money as he thought it would, and so he is reducing the amount to borrow?

Well, sort of. He did decrease the amount for Treasury 3-year note that was auctioned today, from $40 billion to $38 billion. 10-year note that will be auctioned tomorrow will be $24 billion, instead of the normal $25 billion for the original issue.

This week's short-term Treasuries were issued in greater amount to make up for any long-term saving. Timmy's Treasury seems to be borrowing shorter and shorter, not longer.

- 13-week bill: $26 billion, up 2 billion from last week
- 26-week bill: $26 billion, up 1 billion from last week
- 4-week bill: $31 billion, up $8 billion from last week

There's a saying for this in Japanese: 自転車操業. Literally it means pedalling the bicycle. If you stop pedalling, you and your bike will fall down. What Geithner seems to be doing, despite what he says, is to pedal faster and faster as the bicycle gets wobblier. I hope he knows where he's going.

You can track Treasury auctions at my other blog. Tomorrow, the Treasury will auction $25 billion for the Federal Reserve to use, and $24 billion 10-year note. Thursday will be $16 billion 30-year note.

The US Treasury Department auctions slightly over $200 billion in notes and bonds every single month. Greece would be jealous.

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What Is the Federal Reserve Up To?

Something is brewing at the Federal Reserve, that much seems certain.

The Fed's buying of agency bonds and MBS backed by agencies was supposed to have ended as of March 31. Then, why does the Federal Reserve need money now, to the tune of $125 billion?

There were Treasury auctions in March whose only purpose was to raise necessary funds for the use by the Federal Reserve. (My other blog, treasuryauctionwatch.blogspot.com, tracks Treasury auctions. I noticed them as I created the posts. All in all, Treasury sold a boatload of short-term bills in March.)

In March, Treasury Department auctioned $125 billion worth of CMB (Cash Management Bill) specifically for SFP (Special Financing Program) for the Federal Reserve:

• March 3: 56-day CMB, $25 billion
• March 10: 56-day CMB, $25 billion
• March 17: 56-day CMB, $25 billion
• March 24: 56-day CMB, $25 billion
• March 31: 56-day CMB, $25 billion

Every single week in March, Treasury raised money for the Fed. The last time this happened was from March to August, but at most it was 3 special CMB auctions per month.

(Hmmm. March to August, 2009. Wasn't that when the stock market kept going up and up for no good fundamental reason, when every trader shorted or wanted to short the market and got burned?)

If the various lending programs at the Fed are winding down or have wound down already, why does Bernanke need $125 billion now?

In another peculiar movement, New York Fed decided yesterday to unilaterally disclose what was held in Maiden Lane (created to hold garbage from Bear Stearns), Maiden Lane II and III (created to hold garbage from AIG). These "investments" total about $65 billion.

The Fed also has about $81 billion in credit extended by NY Fed to "eligible borrowers" including AIG.

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Short-Term Treasury Bills Lacking Interest Among Foreigners

if 13-week bill auction is any indication.

The U.S. Treasury Department will auction away the last big batch of Treasury bills and notes in the final week of this year. The total amount will probably exceed $200 billion (4-week bill amount yet to be announced), of which $118 billion will be Treasury notes of various durations.

I was making a mental note as I went through the recent auction results, and something felt disturbing (from Treasury Department's point of view, I suppose). So I checked the numbers. And here's the chart of 13-week bill auctions since October, plotting the Indirect Bidder (foreign buyers) Percentage and Bid to Cover Ratio.



13-week bill is a run-of-the-mill Treasury bill. The Treasury Department auctions this bill every single week along with 26-week bill and 4-week bill, to the tune of $30 billion in each auction. No one pays particular attention to the auction results of these short-duration bills. They are continuously rolled over to fund the operation of the federal government.

What I noticed was a rather steep, consecutive decline of the Indirect Bidder Percentage in 13-week bill auctions. Bid to Cover Ratio has also started to decline. Now, both Indirect Bidder Percentage and Bid to Cover Ratio sit below their respective 2-plus month support (dotted lines).

Foreign buyers of Treasuries have shifted to the shorter end, or so we have been told. They now seem to be also deserting the short maturity bills. Treasury Secretary Timmy Geithner has announced the Treasury's intention to increase the average maturity of all Treasuries from the current 49 months to 72 months. That means 7-year note, 10-year note, and 30-year bond issues will be significantly increased. The prices will be pressured. Will foreign buyers increase buying the longer-dated notes and bonds for better yields? Or, seeing that there may be no end in sight for the U.S. deficit spending, will they further decrease the long-term Treasuries holdings?

In the worst case, there will be few foreign buyers to be found for both short-term and long-term Treasuries. The vice chairman of the Chinese central bank has recently said, in no uncertain terms, that the world does not have money to continue to buy the U.S. debt.

Who is going to absorb the avalanche of long-term Treasuries, by the way? This immediately comes to my mind. I hope I'm wrong, but I have this sinking feeling that my hope is ill-founded.

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If You Were Watching Treasury Auction Last September

...you might have been able to get the @#$% out of the stock market in time.

As I was looking for next week's treasury auction information at TreasuryDirect.gov for my other blog, it occurred to me, for some unknown reason, to take a look at CMB (Cash Management Bill) auctions, if any, in September 2008. Since I started tracking the Treasury auctions and Fed's open market operations in May, I know there are CMB auctions done for the Federal Reserve use, and not for the government use.

I wish I had checked these auctions when they were taking place in September 2008.

Here are the CMB auctions under the SFP (Supplementary Financing Program), which was initiated by the Treasury Department at the request from the Federal Reserve on September 17, 2008, the day A.I.G. was bailed out by the Federal Reserve:

September 17, 2008: 35-day CMB, $40 billion (Primary Dealer: $18.68 billion)
September 18, 2008: 76-day CMB, $30 billion (Primary Dealer: $20.58 billion)
September 18, 2008: 20-day CMB, $30 billion (Primary Dealer: $15.43 billion)
September 19, 2008: 45-day CMB, $30 billion (Primary Dealer: $20.47 billion)
September 19, 2008: 59-day CMB, $30 billion (Primary Dealer: $19.60 billion)
September 24, 2008: 7-day CMB, $40 billion (Primary Delaer: $18.34 billion)
September 25, 2008: 34-day CMB, $40 billion (Primary Dealer: $23.98 billion)
September 26, 2008: 101-day CMB, $60 billion (Primary Dealer: $33.60 billion)
September 30, 2008: 15-day CMB, $45 billion (Primary Dealer: $34.05 billion)

September Total: $345 billion

Of that, Primary Dealers absorbed $204.73 billion, 59.3% of the total issue.

On September 4, 2008, the Federal Reserve's balance sheet was $935 billion.

On October 2, 2008, it swelled to $1,274 billion.

(Currently, it stands at $2,179 billion, the level attained since early November 2008.)

At that time, the news focus was on the gyrating stock market and the political front (Fannie and Freddie effectively nationalized, Lehman Brothers bankrupted, AIG effectively nationalized, short sale ban on financial stocks, bank bailout bill pushed by then-Treasury Secretary Paulson and the Fed chairman Bernanke - for more on those hectic days, see my "What the @#$% Happened" series of posts in the "In case you missed" box of the blog). The focus was more on the bank bailout bill as the month progressed, and many analysts, economists, pundits were busy hyping the bill as the savior and cure-all.

"What would happen if we DIDN'T pass this bill?? It would be a DISASTER!!"

was a scream I often heard in certain cable network (that starts with C and ends with C).

We all know what exactly happened the moment the bill was passed: the stock market took a nosedive and kept on diving for 8 trading days.

That caught many investors, big and small, off-guard, myself included. For many people, their portfolios took a huge dent in a very short time.

But if I had paid attention instead to the almost frantic auctions of CMB in September, I could have sensed that things were not well at all, and it was not just the matter of AIG if they needed to raise over $300 billion in such a hurry. I would have probably get out of my long positions, and even bought short ETFs.

This year, the stock market swooned on October 1 on a larger volume, and continued to go down the next day. Many analysts and pundits as well as traders are calling an imminent sizeable correction, if not outright crash (though some do); perhaps they are doing it so that they wouldn't be accused of being caught off-guard yet again, after one year.

This time, however, at least one thing is different: the Treasury Department wasn't frantically raising money via CMB in September.

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