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Bloomberg Joins The Direct Bidder Inquiry, Even As DB Identities And Rationales Continue To Evade

Tyler Durden's picture


We have previously speculated extensively on the recent appearance of direct bidders as a key participant in Treasury auctions. What is known is that the direct take down during the last 2-3 months has at least doubled for most coupon auctions up to and including the 7 year. What is not known is/are the identities of the bidder(s). We have provided some observations on the topic previously (here and here) although our preliminary conclusions are based on circumstantial evidence at best. Additionally, we have highlighted that even as direct bidding take downs have increased, bid-to-cover ratios have reached near record highs, which in itself is also paradoxical and the only immediate explanation is that this is simply a confirmation of Say's law, as this phenomenon certainly does not fit the normal supply/demand pattern.

Our obsession with the direct bidder conundrum is easily explainable as this is a new and very critical presence in the treasury bidding process. The last thing primary dealers need is a source of volatility in the auction process, which could potentially have destabilizing consequences on this most critical cog in funding America's future record deficits. Today, Daniel Kruger at Bloomberg picks up on the topic and thrusts it front and center into the public spotlight, his analysis further confirming our concerns.

Kruger cautions:

Three of the nine primary dealers that met with Treasury
officials ahead of today’s announcement of the government’s
quarterly financing plans said they’re concerned about the
increase in so-called direct bids
, according to people involved
in the discussions. The Treasury said it would sell $81 billion
of 3-, 10- and 30-year securities next week.

Depending on the validity of Kruger's source, this observation should be quite troubling, as it implies the identity of the primary bidder is not even known to the PDs, traditionally entities who are all to aware of all key players in the auction market, be they counterparties or not.

Kruger goes on to highlight the increasingly prevalent role of direct bidders:

Direct bidders accounted for 10 percent or more of the
total in 12 of 42 fixed-rate auctions since July, compared with
only 6 times from 2004 to 2008, according to Treasury data. The
Wall Street firms say the increase in bids sent directly to the
Treasury by investors including banks, large money managers and
hedge funds may raise borrowing costs for the Treasury and
taxpayers if dealers bid less aggressively because of higher
volatility at the sales

“It doesn’t crash our market, but it becomes an
interference, and it will become more costly to place the
,” said James Caron, head of U.S. interest-rate strategy in
New York at Morgan Stanley, one of the 18 primary dealers that
also act as counterparties to the Federal Reserve when it sets
monetary policy.

This observation in itself is odd, as the bid to cover for indirect bids has continued to be in its historic range of about 1.3x. All else being equal, there should be no reason why direct take down should be spiking the way it is (granted, we don't have the full dutch allocation thru the high allotment so we are speculating).

Unlike PDs, Washington does not seem to bothered by the recent change in allocations:

“This is a good thing from the standpoint that it
breeds competition and helps us achieve our goal of financing
the government with the lowest cost over time,” Matthew
Rutherford, deputy assistant secretary for federal finance, said
today in Washington. “We do not encourage or discourage
customers from bidding either directly or indirectly. Ultimately
we think this is a business decision that they need to make on
their own.”

Another alternative implied by Kruger, is that the direct bidders are purposefully avoiding direct bidders. If so, why?

“The Fed and Treasury have a lot of expectations and
requirements for primary dealers and you don’t want direct
bidding to interfere with their ability to underwrite Treasury
debt on a consistent basis,” Bitsberger said. “On the other
hand, anyone should have the right to bid directly without going
through a primary dealer

Here is an example of how primary dealers stand to suffer material and immediate losses if an auction is not immediately beneficial to them:

Primary dealers betting on a jump in direct bids at the
Treasury’s $13 billion sale of 30-year bonds on Jan. 14 were
whipsawed when demand wasn’t as high as anticipated. The sale
was preceded by a record direct bid for three-year notes and an
above-average 10.8 percent direct bid for 10-year securities the
prior two days.

The 30-year bonds, which traded at a yield of 4.68 percent
just before the bidding deadline close, were sold at a yield of
4.64 percent, with dealers putting in bids of $1.84 per dollar
sold, compared with the 2009 average of $1.63. Dealers, who won
54 percent of the offering, or $7 billion, typically sell the
securities in a short-sale before the auction and then buy them
back at the auction at a lower price. Direct bidders won 4.9
percent, down from 6.9 percent at the prior bond sale.

The bids by the dealers led to the four-basis-point
difference in the yield before and after the auction, which may
have lost them about $44.8 million
, according to Thomas di
Galoma, head of Treasury trading at Guggenheim Securities Inc.,
a New York-based brokerage for institutional investors.

Confirming our previous observations about the increasing strength of auctions throughout the year, Kruger notes the following:

The average ratio of bids to debt sold at 10- and 2-year
note auctions is the highest since at least 1993, when the
government began reporting the data. On average, the Treasury
received $2.625 in bids for each dollar of debt sold at 10-year
sales compared with an average of $2.413 from 2004 through 2008.
For two-year debt, bidders asked for $2.937 for every $1 sold
last year, compared with an average $2.391 from 2004 to 2008,
Treasury data shows.

As a reminder, readers can see the BTC on the 2 Year, 5 Year and 7 Year here.

So as it stands, courtesy of Bloomberg we have yet more datapoints which however merely add to the mystery to both the identity and the recent surge in direct bidder interest. Once released, we will analyze December TIC data for hedge fund interest (Carribean, UK banking centers) and juxtapose it with the increase in Direct take downs during the November and December period. We are fairly confident the data will provide no statistical correlations whatsoever, bringing us back once again to our hypothesis #1.


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Wed, 02/03/2010 - 20:25 | Link to Comment Joe Sixpack
Joe Sixpack's picture

A bit off topic, but Ron Paul speaks truth. You gotta see it.

Wed, 02/03/2010 - 21:07 | Link to Comment VegasBD
VegasBD's picture


Wed, 02/03/2010 - 21:02 | Link to Comment Dr Horace Manure
Dr Horace Manure's picture

Completely OT.  Did cancer finally take Marla from us?  If not, where the hell is she? 

Wed, 02/03/2010 - 21:52 | Link to Comment Anonymous
Thu, 02/04/2010 - 08:32 | Link to Comment Anonymous
Wed, 02/03/2010 - 22:04 | Link to Comment IveBeenHad
IveBeenHad's picture

Whoever it is (fed or not) I love the fact that it is costing the PD's money as they're "fixed" game is suddenly not so fixed.  Lovely example btw for us lesser mortals to understand exactly how the PD's stand to lose a boatload of cash.

And who said there aint a recession on wall street? 

Wed, 02/03/2010 - 22:15 | Link to Comment john_connor
john_connor's picture

This is probably just Goldman gaming the bidding process.  They are simply adjusting their business model for the potential loss of prop trading revenue. 

What a bunch of phuckin' jackals.

Wed, 02/03/2010 - 22:22 | Link to Comment SayTabserb
SayTabserb's picture

Could the direct bid be the way the Fed implements a clandestine QE2? Or would it be too obvious from an analysis of its Open Market operations?

Wed, 02/03/2010 - 22:24 | Link to Comment Charley
Charley's picture

Hypothesis number one - the US and China must have complimetary monetary policy - indicate a relationship I have found by following a completely different path having nothing whatsoever to do with this subject. I believe it must also be met by massive new fiscal deficits as well. Fiscal policy must also reinforce the current monetary policy - which is to reflate.

See here:

"In fact, one might argue that US policy is not bad, in part unintentionally. The Fed is willing to say that it does not like deflation, but not to say that it would allow temporary above-2% inflation in the future. At least to first order, it may then be helpful that the US has a legislature with an effective 2/3 majority rule and a significant faction that believes all tax increases are evil. In the US, things may be working out as well as they are — “appetite for risk” is returning — precisely because the long-term returns from US debt are at least uncertain. On the other hand, real, coherent, coordinated fiscal and monetary policy with forward guidance could no doubt do better. The current situation creates unnecessary, large amounts of uncertainty about policy."


Oh, how the Gods play with us!

Wed, 02/03/2010 - 23:05 | Link to Comment phaesed
phaesed's picture

I'm really wondering about private banks and how they figure in on this. Also we now have, but the truth is probably a bit more nefarious than I originally imagined.

Still, I go long TLT tomorrow. :P

Wed, 02/03/2010 - 23:06 | Link to Comment Jim in MN
Jim in MN's picture


The Fed, or some sovereign or sovereigns in league with the Fed, are giving the Fat Finger to the bond market. 


How would you like it if the thing you had been buying your whole life, knowing that you could make a modest living as the waves rose and fell, were suddenly pinned down to an arbitrary (and arbitrarily HIGH) price level?  With the known and trusted arbitrage and temporal cycles all shot to Hell?


Now, what if you were the Godfather and this happened?


Tick  tick  tick


Thu, 02/04/2010 - 00:26 | Link to Comment Anonymous
Thu, 02/04/2010 - 01:11 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Wiazards of alchemy is what they think of themselves as.  I like to think of them as BS artists.

This is getting out of hand, really.

Thu, 02/04/2010 - 01:56 | Link to Comment Anonymous
Thu, 02/04/2010 - 03:13 | Link to Comment Anonymous
Thu, 02/04/2010 - 06:23 | Link to Comment Anonymous
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