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$16 Billion 4-Week Bill Closes At 0.025%, Bid To Cover Surges To 5.5 As "Window Dressing" Thesis Is Refuted
"Tremendous amount of cash coming in" in the first Bill auction of the year (that's right, after the books closed). But wait, we thought that insane demand for ultra-short maturity Bills was only a function of end of year window dressing as asset managers had to park their money in Bills for LP demonstration purposes. You mean that's not the whole story? The closing high rate of 0.025%, and more indicatively, the 0.000% low, demonstrates that there still is no scarcity of demand for Bill. Most importantly, the Bid To Cover came in at a massive 5.5, compared to the 3.95 in the prior week (yes, the week when the window dressing excuse still made sense). Time to hire the Blackstone spin doctors again.
- Primary dealers tender $67.678 billion, 77.05% of total comp, accepted on 6.680 billion, (42.41% of total) 9.87% hit ratio
- Direct bidders at $8 billion, 9.12% of competitive tender, 4.81% hit ratio
- Indirects take $8.7 billion of the competitives
- Indirect bid-to-cover 1.4
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People are holding cash, banks have to buy short term bills....
What doesn't make sense?
Almost forgot to mention, don't forget the reserve ratio requirements went up on January 1st as per FASB modifications. That offers a plausible explaination of the higher bid to cover by directs.
Essentially, what it does lend credence to is the use of treasury bills as cash reserves by banking institutions.
The key to take away from that is the evidence it provides that cash is related to treasuries. Now the key item to ponder over is that if cash is related to treasuries.... does dollar strength correlate to treasury ownership?
The world is far from ready to shun Treasuries IMO...one day, but not right now. Its just my sense from the things i've been reading that international allocations to Treasuries might be a little light so I would expect dollar strength and Treasury appreciation to go together. However today the dollar is slightly down while the 10 yr is up in price. Curiouser and Curiouser.
By ownership I mean US vs Foreign.
Imagine what our country would be like if our debt was entirely funded internally.... What would our Chinese overlords think? :)
Just one guy's thoughts here, but in the internal discussions we've had a 10 yr at 4.5% would be a very compelling buy compared to the yields available through other issues...were we to start buying ours would be the internal US money going to work in Treasuries, and I reckon others would feel the same way.
This is the biggest reason why I don't think we can have a blowout of longer term yields this year. IMO we're within 50-75bps of long dated Treasuries being competitive with most other asset classes.
Okay, if this sounds snarky (gosh I love that word) please don't take it to be so because I'm not trying to be.
If you demand higher yields (as an American), you're effectively demanding higher tax rates.
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Our tax dollars pay the coupons on treasury bonds.
Higher yields mean we need to make higher payments.
Higher payments mean we need to pay out more dollars.
Paying out more dollars means we need to obtain higher tax revenues.
Higher tax revenue requirements mean higher taxes which effectively would hit the upper classes more than the lower classes in revenues (despite the poor paying the higher interest rates at the margin for interest costs in company expenses passed on to the consumer).
--------------------------------
So NOW, let's look at this from a microeconomic perspective.
--------------------------------
The American investor gets a higher yield.
The coupon rate has now increased. (Fr (face* rate) at time 1 > Fr (face* rate) at time 0)
The amount taxed has now increased. (TaxRate * Fr (face* rate) at time 1 > TaxRate * Fr (face* rate) at time 0)
But due to higher interest costs, the tax rate has increased (TaxRate at time 2 > TaxRate at time 1)
Therefore the Return on Investment has decreased (CouponPayment - FR*TaxRate(2)) < (CouponPayment - FR*TaxRate(1))
- <assuming the increase in taxation exceeds the increase in yield, this may not be the case, but if you consider your aggregate income, the case becomes clearer>
So, since American's are demanding higher yields to invest in their own country, they are demanding a lower return after taxes.
The American investor now receives a lower total yield.
But there's more.
Do foreign entities pay taxes on American Treasury bonds? I don't mean foreign investors, I mean Foreign Central Banks?
Somehow, I doubt it.
SO, Foreign Central Banks have a TaxRate=0, therefore (FR*TaxRate(2) = FR*TaxRate(1)) = 0
Effectively, Foreign Central Banks receive a higher payment, meaning a larger outflow of capital from the United States or more succinctly, the American Taxpayer.
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I haven't even begun to discuss how this affects corporate revenue.
(in Homer Simpson voice):
mmmmmm....snarky........lol
Not snarky at all, thanks for the perspective on thisun
if your working
I quit my job to do research (I worked in the Financial Services industry too - the ignorance is astounding). Cap gains are still taxed as ordinary income
I'm just a nobody, but I buy 3mos. or less T-Bills now for 0% interest and have emptied my money mkt. accounts entirely. I'm trying to keep my life savings safe.
You're right that you are a nobody.
You could also be a banker attempting to create the illusion of demand. If this were a name I recognize, I'd accept the comment.
lol, hilarious.
ya know? :P
Foreign buyers will probably stay in the shorter maturities going forward as well. I think demand in this segment will stay strong this year for the reasons you mention also.
We'll probably see a sharp bounce in the prices of the 10 year and 30 year in the short term as these are severely oversold, this being a great short opportunity in these longer maturity bonds. A ten-year bond trading around 100'000 would not be unexpected by the end of 2010. An equity market blow-up would of course negate this scenario in the short term.
Do a back of the napkin analysis of shorting these for a quick review of how helixed-up the world has become.
Oh, to have a smart nephew or chesty niece as a White House page!
is this the case of the farmer buying his own corn? we know they use foreign surrogates to backstop them at auction, if all this money is being tied up in short term fixed income, where's all that money coming from that is going into the stock market?
Fact is, REAL money too a great extent, never went into the stock market. The evidence is pretty overwhelming that the Fed used primaries to buy stock futures to massage the market up....one less crisis! Afterall, they have termed this depression a "credit crisis" not an equity crisis. According to Gross at Pimco, some $20 billion a week is leaving money market funds with the assumption it's going into stocks but it may actually still be going into to treasury bills....just guessing.
Wow--
The SEC decrees that Money Market Funds are no longer safe and the fund managers can refuse to redeem the funds.
Then, the bid-to-cover ratio spikes from 4 to 5 on today's T-Bills, the competitor to money market funds.
Cause-and-Effect?
Is Geithner effectively herding the sheep from money market funds to treasuries?
yep, they will do anything to keep the treasury ball rolling.
next, look for American Investment Bonds or some type of marketing gimmick like WW2.
somehow they will find a way to push down the fdic "guarantees" with the suggestion that the excess money go into the "safest investment in the world" US treasuries. Say, knock down the fdic limits to 50 k and move the remainder to treasuries.
Is this an early sign of the abandonment of the long end of the yield curve? 5.5 bid-to-cover is quite robust. One might wonder if this might foretell of a significant skewing toward high bid-to-cover for the bills, away from bids for the notes.
The economy is going to be fine. Ford's economist says so.
...or you can simply use your FRN's to buy tangibles like China announced it will today:
http://online.wsj.com/article/BT-CO-20100103-703765.html
BEIJING -- China should set up a special entity to buy oil and other strategically important resources using funds from the country's foreign-exchange reserves, the central bank-run Financial News reported Monday, citing Sheng Songcheng, head of the Shenyang branch of the People's Bank of China.
Such an entity could buy foreign exchange from the central bank or on the foreign-exchange market, Sheng wrote in a commentary in the newspaper.
China's forex reserves, the world's largest, reached US$2.27 trillion at the end of September, with the majority of the assets denominated in U.S. dollars. China worries that a depreciation of the dollar would erode the value of these holdings, especially after Washington's efforts to prop up the U.S. economy with a near-zero interest rate and massive deficit spending kept the dollar weak for much of 2009.
However, Sheng said the yuan's exchange rate to the dollar doesn't directly determine the value of China's forex reserves. He said the value of the forex reserves is more closely linked to the dollar's actual purchasing power and the rate of inflation in the U.S.
He also said while an increase in China's forex reserves would add to the appreciation pressure on the yuan, such an increase may not necessarily result in the yuan rising because the currency's value is determined by many other factors. He didn't elaborate.
And China quietly takes one step towards the door. One step closer to the glorious future panic sell. Still waiting who will win the Mexican Standoff for who can pull the trigger on the dollar first: Japan, China, or the US.
http://www.youtube.com/watch?v=sXldafIl5DQ
A classic. The only question here is who is the Good, the Bad, and the Ugly?
Especially since the treasure is still represented as a dead and buried unknown warrior...
a case of shunning the long end and hy methinks
I'm going to have to agree. People are seeing some writing on the wall with all of the jawboning about non-redemption => people are flooding the short end. This also fits into the thesis with regard to the time duration reduction (i.e. blackhole around 90 day maturity).
there will be insatiable demand for any type of treasury paper as long as interest rate swaps are alive and well and growing....
0% is a competitive yield. WTF else out there is gonna deliver this?
Yields seem to be dropping on even safe investments...I've been trying to track KMP for an entry for sometime and have just watched its yield dive. Still around 7% but I was hoping for better :(
Don't yields drop in deflation?
KING DOLLAR.
Right up until the US defaults
The flow of funds from the corporate world to short dated treasuries remains intact.
Yup. And I can't wait to see the competition between the Turkish 30 year and our 30 year auctions coming up. My money is on the U.S. having some 'issues' with that auction.....
question for phaesed, or anyone else who can answer this: what percentage of the outstanding Treasury and agency debt is held by America?
Oh my man, that's one of my projects. I'm not sure, but I can reasonably guarantee it's less than 30% or so. I'm also willing to bet we were close to 50% right before 2001. I mean I would bet two fingers on that (I'd say my hand but I'm a fast typer :P)
One good way to show high bid to cover ratio is to offer less, like $16 billion that they did this time. Last week was $23 billion. Week before last was $28 billion.
If there is a failure it will appear first at the longer end of the curve, and indications in forex perhaps secondarily. the short end of the curve will be the last to go.
Why not hire Blackwater ?