Ugly 7 Year Auction Caps Miserable Week For Bond Bulls

Tyler Durden's picture

Today's 7 year auction capped a miserable week, in which the 2 and 5 Years auctioned off placed at very ugly terms, although none probably quite as ugly as today's 7 Year. The $29 billion QT0 priced at a 3 bps tail to the when issued, replicating yesterday's action, and pricing at 2.43%, the same as last month, but at a Bid To Cover of just 2.62, the lowest BTC since March 2010 when QE1 was ending and the future was unclear. And like during the past two auctions, the internals were decidedly ugly as Dealers had to take up 56.07% of the amount offered: the most since May 2009, when however the Direct bidder category was a non-factor. Indirects continued their trend of stepping away from all issuance and bought just 32.17% of the bond, the lowest since March 2009. Additionally the hit rate on the indirect bid was a whopping 86%. If anyone has figured out just how foreign banks will step in to fund US bond issuance, please let us know, because we are confused. And Dealers will not be all that excited to have to convert risk assets into paper yielding just over 2%, in the absence of the Fed's vacuum pump... Certainly not at these rates. Slowly, the realization that OT2 is not coming a week ago is starting to soak in as the Treasury complex is finally realizing that Gross was right all along. Exhibit A for the past statement: the performance of the 5 year in the past 3 days, whose 32 bps blow out is the 3rd biggest such move. Ever.

But don't take our word for it. Key excerpts from Stone McCarthy's take:

  • "today's 7-year note auction was atrocious."
  • "The auction stopped a full 3 basis points above the 1:00 P.M. bid side, and the 2.62 bid/cover was the smallest since March 2010."
  • "It was the smallest Indirect bid since April 2009, two months prior to the change in bidder classification rules that resulted in more of the auction bids being attributed to Indirect bidders. The bid accounted for just 14.3% of the overall bid, which was a record low."
  • "the 32.2% Indirect takedown today was the smallest since March 2009."

Curiously, the bond vigilantes may skip Italy altogether and focus on the biggest ponzi of it all.

7 Year historical results:

The 5 Year move in the past 3 days in context:

h/t John Lohman

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max2205's picture

Ben: rutrow...must. crash. stocks . to keep rates low

oldmanofthesee's picture

If I understood correctly, I agree. The Bernank and the squid have to collapse equity prices, so the "flight to quality" that results, will keep bond yields depressed. When those low rates get free, that should do it.

johngaltfla's picture

STRIPES baby...

BOOM, chugga lugga,

BOOM, chugga lugga,

BOOM, chugga lugga,

Oh my F'in God:



(In other words, yup, and the fan can't handle the shit heading towards it)

anti Oligarchy's picture

Bill Gross will be more than willing to step in and buy when rates recognize the risk involved.

101 years and counting's picture

sacrificed first:  bonds or equities?

eventually both.

then QE3.


SheepDog-One's picture

I say equities get the rug pulled out to save bonds...last thing Bernank wants to see is his POMO bond efforts wasted. They might slip it in tonite into futures, shave off 300 from the DOW overnite, chase sheeple morons back into worthless bonds from worthless stocks...sounds about right.

4shzl's picture

Make that 38 bps on the 5-yr. 


So what does Chairman ZIRP have to say about this?

Hank Paulson's picture

You can't have a bond crash, the outcome is predetermined before the auction takes place.  The fed just uses it a reserve tool.  The US does not need to issue bonds as we have a monopoly on the currency supply.  The bond market is a relic of the gold standard days and no longer even needs to be in place, that is why you cannot have a failed bond auction.  The government does not borrow and then spend, they spend regardless as there is no need to borrow.

traderjoe's picture

Can't tell if you are being sarcastic or not. In theory much of what you say is possible and theoretically correct. But in practice you are wrong. The currency of the land is the Federal Reserve Note - which is issued by private banks and the privately held Fed. Our government must borrow the FRN from them in order to spend it. It does not have to be so, but that's how it is done. The ultimate gift to the bankers.

The US is not sovereign in its own currency.

LawsofPhysics's picture

Yep.  Precisely why all things paper will continue to detach themselves from all things physical.  Everything will be "fine", as you point out, yet the SNAP participation will grow exponentially.  That has a real cost, both socially and economically.  As you point out " they spend regardless as there is no need to borrow."  

Either way, there is a very real cost for creating capital and then mal-investment. Take you pick, we can end "mark to unicorn" accounting or be essentially forced back to a gold standard by default.  Likewise, the Fed can not have asset inflation without wage inflation.  The real world and technicals do matter, oil will remind us why, again.  FYI idiot - we are paying the Federal Reserve (a private banking cartel) interest to coin our own money when the constitution says we can do it ourselves.  Pretty stupid, but nothing another revolution won't fix.

rex-lacrymarum's picture

Another critique of chartalism (or 'modern monetary theory' as it calls itself these days):

Raymond Reason's picture

That's why they named it the Federal Reserve instead of the International Banking Cabal.  To confuse people into thinking it's American...and it worked.  

ibjamming's picture

My God!  With this system you don't even need a budget!  No wonder we've gone so long without long has it been since the last official budget? 

Boston's picture

If anyone has figured out just how foreign banks will step in to fund US bond issuance, please let us know, because we are confuse

Biderman was on CNBC this am and said that QE helped create $9 trillion in equity wealth.  So after tomorrow, (the Fed stops pumping in about $75 billion per month), SOME of the buying could come from this "extra" and unsustainable $9 trillion.  

There's certainly enough here.....relative to the Fed's $75 billion per month.

And let's look at the five year last year, just as QE1 was winding down---it shot UP from ~2.35 to ~2.75%. Hmmmn, just like last year, the five year is shooting up, as QE is winding down.  But then, in May 2010, the 5 year began it's march DOWN to 1.0% in October, reversing only after the imminent effects of QE2 began to sink in and breakevens started grinding higher.

If 2011 is a "carbon copy of 2011" (TD), then why would that apply ONLY to equities, but not Treasuries?


John McCloy's picture

A whole paper 9 trillion..cannot wait for everyone to liquidate at once.

LawsofPhysics's picture

Hhmmm.  Inflationary or just plain flamatory?  Asset gobbling for pennies on the dollar?

Boston's picture

It would only take a small % of the equity "paper" to move into Treasury "paper" for the 5 year to collapse down to 1.0%.

This is exactly what happened in 2010.


css1971's picture

Yeah, but the equity paper would no longer be worth 9 trillion.

Boston's picture

Of course, that's why I said "SOME".  

Let's assume, to be aggressive, that 75% would vaporize.  That would still leave over $2 trillion scrambling to seek shelter.

What other asset class---other than US Treasuries---could absorb ~$2 trillion in a reasonably quick period?

(Btw, I'm ignoring HY and commodity sell-offs. How many $ do you think would flood out of those buckets in/when risk goes KaBoom as it did in 5/10?)

css1971's picture

Biderman was on CNBC this am and said that QE helped create $9 trillion in equity wealth.

You do know that net worth is bollocks?


SheepDog-One's picture

I dont know what 'bollocks' are exactly, but it sounds bad.

hambone's picture

Just imagine the oh so distant raising of the debt ceiling and the flood of T issuance to catch up w/ our profligacy and no BB their w/ infinite fiat to soak it all up...10yr could actually rise to 4% (oh no) or the nightmarish 5% (cover your eyes)...not sure but guessing that would pretty much send housing back off the cliff.


Hondo's picture

Tell me again how ugly auctions, higher rates are good for stocks??

hambone's picture

Little thing called moral hazard...everybody knows the faster the bond market cracks, the sooner BB and his fiat chopper returns...everybody's already lining up for the QE2 encore, the really big exciting to see what this creative genius will conceive of next!

SheepDog-One's picture

Thats going to be the funny part, equity junkies all lined up with their crack pipes in hand waiting for Bernank to present them with more Hefty bags of free crack, and it wont happen. No QE3, definitely not in the form equity junkies believe it will be in anyway. Ben isnt going to be pumping stocks with his precious POMO bonds collapsing, sorry its just not happening.

hambone's picture

But you know how persuavive crack addicts (w/ lotsa high paid former politico-turned-lobbyists) can be!!!  Come on Ben, give it to me or, or, or I'll crash the markets and then where will you be...nowhere, that's where! 

Ben's and TPTB only power is fiat creation and dissemination to themselves for free to buy real assets and/or "loan" to sheeple...absent that, what do they have?

buzzsaw99's picture

I'll play devil's advocate for a moment: Banks borrow at 0% (or negative). Therefore if the long end tanks the spread soars, when the spread soars bank profits soar. Bank profits soar, the stock market soars. You asked for it, there it is.

idea_hamster's picture

how foreign banks will step in to fund US bond issuance

Can Dexia draw on a swap line with the Fed, putting up Greek debt, and use the US$ to buy UST?


monopoly's picture

Bond market getting interesting. Got TBT, small for now.

You guys noticed silver today. Geesh, I thought it was going to 20. Nice move in miners in case Robot forgets to post them.

MFN NGD SLW GG stars today and yesterday.

a_ext's picture

Ironically that silver strike hit right as news broke that the Finance Ministry was burning in Athens.




bruinjoe93's picture

Monopoly, That is an outstanding list of gold and silver stocks.  I would add AG to that list.


gkm's picture

Better print some more funny money to buy the funny money that pays a little more funny money than it did before the funny money auction.

a_ext's picture

I assume we are all aready short?


hambone's picture

I hope to god you are joking!

carbonmutant's picture

You don't need to be talking this trash while the markets in the middle of a rally... lol

slewie the pi-rat's picture

this isn't too important as congress will soon balance the budget and we shall soon begin retiring the Debt,...


baby_BLYTHE's picture

4% inflation per year is what the chairsatan wants. It is what the congress wants as well.

All this debate is just political theater.

They all go to get drunk with each other at the end of the day. Meanwhile, hardworking Americans suffer.

slewie the pi-rat's picture

i know.  benzelbub dreams about re-flation, doncha think?  so much debt, so little money...must. print. more. 

+new avatar+  who's your model?  hahaha! 

baby_BLYTHE's picture

I am a photography student. Last week I got a new camera and have been messing around with it. My arm looks weird because I took my own pic

augie's picture

I ment to post this awhile ago but was to much of a pussy to do so.

I wrote this for you.

The trick is to find the line between grateful and apologetic appearing neither conditioned nor counterfeit. To ride the mellifluous river of lies, slowly spilling into the abyss; all the while marveling at its petrifying beauty. Inspiration takes many forms but none so sweet as the one without societies norms.


I post this now because i watched this video series about creativity, and i thought you should know your photography inspired me to write that about you. 


SheepDog-One's picture

WHEW! Thank God for that....for a minute there I thought we were in real trouble!

ArrestBobRubin's picture

C'mon, don't you really mean for Bond Bullshitters?

mayhem_korner's picture

Flight to quality - despite the Greek Finance Ministry blazing, money flows away from USD and Treasuries.  Is the market that gullible to the transitory austerity of Europia?

Paul67's picture

Assuming we don’t get a debt ceiling increase until sometime after the August recess (ie government floats some payables 30 more days or so), won’t this shutdown UST auctions until then as well?

Herbert_guthrie's picture

The crumbling of bonds is the foundation for a good solid hyperinflation.