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Who Buys Treasury Securities At Auction?
In response to many inquiries about the process of UST purchases, and the simplification of the key actors, it is usually best to get the information straight from the horse's mouth. I present a paper from the New York Fed highlighting statistical data of Treasury purchases by purchaser, which also lays out the basics needed to understand what in theory happens when an auction occurs.
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I love the CAPTCHA question :)
No content, blank page.
What don't the primary dealers have their hooks in?
I seem to remember that the Treasury changed how it classified indirect bidders, sometime at the end of 2008 or beginning of 2009. At the time, nobody was exactly sure what implication this would have on the bid to ask ratio... but several bloggers/experts said they were looking into it. Does anyone have a good concise explanation of this change - why it happened? or what it means?.
http://www.reuters.com/article/bondsNews/idUSN2425368520090624
US Treasury auction changes may overstate indirect bid
Wed Jun 24, 2009 2:10pm EDT
By Pedro
Nicolaci da Costa
NEW YORK, June 24 (Reuters) - Recent changes to the way the U.S. Treasury
tallies demand at its bond auctions may be artificially inflating
"indirect bids," a category used by investors as a loose proxy for
foreign demand.
Foreign investors own more than a quarter of the Treasury market, making
their continued interest in U..S. bonds of paramount importance to the market.
At the very least, the Treasury's shift, made earlier this month, is
confusing traders, prompting some to second-guess the apparent strong interest
in recent auctions.
Indirect bids have been unusually strong of late, reaching a record 68
percent at Tuesday's two-year note sale, and exceeding 62 percent at
Wednesday's sales of $37 billion in five-year notes.
"We're not going to make much of that, given the information we've
gotten on the rule changes," said John Spinello, fixed-income strategist
at Jefferies, a primary dealer. "The indirect bids are now going to be
higher given the change in procedures."
Indirect bids are defined as ones that do not go through primary dealers,
large banks that do business directly with the Fed and are required to actively
take part in Treasury auctions.
Top officials in China and Russia have expressed unease about the growing
U.S. budget deficit, slated for a record $1.75 trillion in fiscal 2009 alone.
This means that traders pay extra close attention to foreign demand figures.
The Treasury's changes, contained in a June 1 entry to the Federal Register,
relate to what it considers a "guaranteed bid." Under the previous
arrangement, once a primary dealer offered securities at a pre-specified level
to its customer, that bid was considered to be the dealer's own.
The matter was technical enough to confuse even industry veterans.
"We are not precisely sure what this all means," said Ward
McCarthy, managing director at Stone & McCarthy Research Associates in
Princeton, New Jersey.
"We spoke with some very seasoned market players with decades of
experience on dealer trading floors who were similarly unsure what to make of
the contents of the Federal Register."
The Federal Register entry can be found here
The Treasury was not immediately available for comment. (Additional
reporting by Ellen Freilich and Kristina Cooke; Editing by Kenneth Barry)
Thanks, I found this from the Treasury's news release... it seems pretty above board from my reading.
Specifically, we are eliminating the provision in 31CFR 356.14(a) that states, ``If a bid from a depository institution or
a dealer fulfills a guarantee to a customer to sell a specified amount
of securities at an agreed-upon price, or a price fixed in terms of an
agreed-upon standard, then the bid is a bid of that depository
institution or dealer. It is not a customer bid.'' This particular
provision dates back to 1995 when Treasury conducted multiple-price
auctions, which are auctions in which each successful competitive
bidder pays the price equivalent to the yield or rate that it bid.
Prior to the close for submission of competitive bids, certain dealers
were entering into arrangements to guarantee their customers \7\ a
price conditioned on the outcome of the auction (e.g., the weighted
average yield determined in the auction).\8\ This provision was added
in response to and intended to address that specific practice. In 1998,
Treasury shifted to single-price auctions for all Treasury marketable
securities, which are auctions in which all successful bidders pay the
same price regardless of the yields or rates they each bid.\9\ Because
Treasury no longer conducts multiple-price auctions, the provision is
no longer needed or effective. Treasury expects any depository
institution or dealer guaranteeing bids in a single-price auction to
reexamine this practice, confirm that the bidder has been properly
identified on the bid, and raise any questions with Treasury staff.
"The UOC contains several provisions to regulate bidders \6\ in a
Treasury auction. We are eliminating a provision at 31 CFR 356.14(a)
related to ``guaranteed bid'' arrangements in Treasury auctions that is
no longer needed. Specifically, we are eliminating the provision in 31
CFR 356.14(a) that states, "If a bid from a depository institution or
a dealer fulfills a guarantee to a customer to sell a specified amount
of securities at an agreed-upon price, or a price fixed in terms of an
agreed-upon standard, then the bid is a bid of that depository
institution or dealer. It is not a customer bid."
This particular
provision dates back to 1995 when Treasury conducted multiple-price
auctions, which are auctions in which each successful competitive
bidder pays the price equivalent to the yield or rate that it bid.
Prior to the close for submission of competitive bids, certain dealers
were entering into arrangements to guarantee their customers \7\ a
price conditioned on the outcome of the auction (e.g., the weighted
average yield determined in the auction).\8\ This provision was added
in response to and intended to address that specific practice. In 1998,
Treasury shifted to single-price auctions for all Treasury marketable
securities, which are auctions in which all successful bidders pay the
same price regardless of the yields or rates they each bid.\9\ Because
Treasury no longer conducts multiple-price auctions, the provision is
no longer needed or effective. Treasury expects any depository
institution or dealer guaranteeing bids in a single-price auction to
reexamine this practice, confirm that the bidder has been properly
identified on the bid, and raise any questions with Treasury staff.
"
Very interesting question, even more so, after the end of October.
I could have never imagined that 5 years ago that I would be excited about this paper... but I am... what a sad state of affairs...
"what a sad state of affairs..."
Not really. In fact, it is the most important positive development of this whole crisis. Informed citizens are our ONLY protection against criminals overtaking the reins of our government and economy.
Thank you for putting it in a different perspective...
this still doesnt tell us if the money supply is decreasing because domestic players are buying up treasuries.
The market need s to be propped up if we get another 2000 point decline the're will be blod in the streets
Since everybody pays the same price it no longer matters if I buy some on my own while at the same paying my broker/dealer to buy the rest. It's not like I'm trying to corner the market on 1 month t-bills at .01% interest or anywhere out on the curve at these rates.
All this fuss over xenophobes (not in this thread but in general) when Footnote 8 states the Federal Reserve comprises 21.3% of the bill market (albeit outside of the auction process) while Table 4 shows 11.1% is that of foreign direct investment. If you see a 3 month bill at trading at a level propped up by one arm of the government buying from another, does it still not influence the yield to be bid on the rest of the way down the chain?
I want to make an analogy to X-Bay where I am both seller and bidder that has permission to bid up to an approved reserve in a no reserve auction so I can sell my "Sunken Treasure Chest of Un-Searched Coins" to children.
Who am I hurting? Those damn kids have no conception, period.
Caveat Government.
Bottom line is it's tough to figure out how much comes from the Fed; directly or indirectly through it's lending to member banks.... how much is really being bought by investors???? Major scam going here folks.....
stiglitz is right on about the banking complex being worse than pre lehman. He goes on to wonder if the fed pulls back how will the govt support itself and who will support the gov't - rhetoriclly of course. Obama making a speech = near desperation.
In re indirect bidding, try this.
http://acrossthecurve.com/?p=6629
link appears broken... or maybe it's something on my end
US futures getting crushed tonight, this is going to be an interesting battle all week going into OPEX. I think bears come out on top (for once).
Why would anyone believe anything the Fed states? They would never disclose anything that would be damming - Never! The real situation must be much worst.
Nikkei takin' a dump
A big, big dump... I think Obama better get a bigger Mission Accomplished banner and a snappier Flight Suit for tomorrow's speech... because I am of the opinion it is not going to be a friendly day for the markets...
I believe everything that the Federal Reserve Research and Statistics Group publishes. Without question. Like, totally.
Me neither.
The BDs, duh,
borrow at .25%
lend at ~3.46%
simple math, biggest carry trade ever
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As a trader participating on your exchange, I request that you respond to the inquiry as well. Thank you.
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It will get the gold if its bid is successful and at the price it has offered
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