10 Year Bond Smashes All Records In WTF Auction

Tyler Durden's picture

Only one word to explain the just completed 10 year reopening auction. WTF!!! While the 10 year When Issued was trading at 1.516% at 1pm, when the release hit of the final High Yield on the bond, jaws dropped, as it came at a shocking 1.459%, nearly 6 bps inside of the WI, a record, a yield which also was a record, a Bid To Cover of 3.61 which was the second highest ever, second only to the 3.72 in April 2010, but it was the internals that were the most jarring of all. Unlike all recent auctions in the past 4 years, the Primary Dealer take down was only 14% a record low in recent years, and a hit rate of 6.8%, another record low. The offset: Directs, which took down a whopping 45.4%, another record, after tendering a record $16.9 billion in bids. All in all there was no definitive reason to explain why this auction was so very, very off the charts, and so mispriced by the secondary market, suffice to say WTF, and that this is what happens when there continues to be just one game in town: frontrun the Fed! Three possibilities: i) either someone was caught massively wrong-footed going into the auction and covered a massive short into the primary market, ii) capital reallocation from European money market funds which as we explained last week are now all dead, or iii) some "Direct" entity somewhere, has a gaping need for good collateral and would literally pay anything for US paper ahead of an even bigger margin call. The reason we say this is that only 51.7% of the auction priced at the high yield (remember: Dutch Auction): and the low yield was 1.36% - someone, supposedly a Direct Bidder, was in a furious rush to get any paper, at any price. If the latter, we will find out very soon.

S&P 500 futures went absolutely dead for a few minutes with negligible volume as we are sure algos all got triggered to close. Now ES is drifting lower to catch up to 10Y response function:

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slaughterer's picture

All that loose JPM/GS Euro MM money had to go somewhere...

Aziz's picture

Bubble phase.

We do not know when or how it will end. But when people throw greater swathes of money into any system that continually loses value, that is unsustainable. 

eclectic syncretist's picture

It's time to get out, and get out for keeps!!!

Complacency is going to hurt a lot of people soon enough.

TheCanadianAustrian's picture

Pure mania. Time to sit back and just watch this thing play itself out.

Yikes's picture

We've got a long way to go. 


Take a look Japan's 10-year  -   .79%


This bubble is sticking around for awhile.  The only caveat is that that their will be accleration towards the end.

Pladizow's picture

Can the FED buy more then 100%?

derek_vineyard's picture

japan circa 1989 to present

domestic deterioration, eat external inflation

but never, never , never give up the million dollar bonus

Oh regional Indian's picture

Build bridges to nowhere, forever...re-surface roads till they are as smooth as can be....keyensian wet dream. Japan.


derek_vineyard's picture

lol @ risk on/ risk off

at 1.46% this is a risk on holding

aerojet's picture

We need a better money sink than just building useless infrastructure.  That stuff costs real money.  They need something where the excess liquidity can just go "poof" and disappear and do it to the tune of 100s of billions or trillions of dollars.

af7779's picture

Somebody get Corzine on the horn

kito's picture

@pladizow----clubdebt always reserves seats for the vip.......

Al Huxley's picture

I was just thinking the same thing - the mad rush to buy, without any regard for anything other than 'getting in now before the price goes up' is just classic bubble behaviour.  Funny thing is, though, I expect it's just the start of the parabolic phase (hard to imagine, parabolic rise in bond prices of a country with 16 trillion in debt and a 1.5 trillion deficit, but bubbles are what they are).  Of course, when the inevitable crash comes...

aerojet's picture

Not hard to believe at all in light of what just took place with Euro MMs--The money markets are supposed to be widow and orphan bedrock stuff and they just essentially went negative, so the bonds are the next "safe" haven.  But those are just paper, too...

CrashisOptimistic's picture

You guys are just wrong.

Bonds are the investment of the 75 year old.  That first.

Bonds are the investment of the 75 year old who is scared.  That second.

There Is Nowhere Else to Hide With This Level Of Liquidity. 

That they are making money while doing so is gravy.  They are there because the crushing reality of deflation is apparent everywhere a 75 year old looks up and down his street and they have to have a place to hide.

That's bonds.  It's going to stay bonds to -0.75%, at which point it will be clear that there will never be growth again (thanks to oil scarcity) and they'll just stay there.

FeralSerf's picture

You are just wrong.

Treasuries are the "investment" of the Federal Reserve.  They are the way interest rates are manipulated down.  They are also the way the US Gov't pays its bills -- over half of them.  And, of course, the "investors" that see this know that there's money to be made following those trades that are associated with lower interest rates.

steve from virginia's picture


Mr Market likes Treasuries, that's all that needs to be said.

This is what deflation/deleveraging looks like. There is nothing the central bank(s) can do to stop it. The can only postpone the inevitable.

Solon the Destroyer's picture

We do not know when or how it will end. But when people throw greater swathes of money into any system that continually loses value, that is unsustainable.

I disagree.  As Tyler points out this is front-running, which means they aren't throwing money into a system that continually loses value, they are making risk-free profits.  No one, other than foreign entities without PD status is holding this crap to maturity. This is no longer an investment game it is a speculator's game.  As Dr. Engali mentions below, this even forces widows and pensioners into the speculation game if they want to earn any money off this paper.

This is very bad for the Fed. They want the hot money to flow into commodities. But who in their right mind is going to take risks on futures with a declining economy when the Fed will give them free money for no risk? 

Not to mention the liquidation burden of all debt has just increased with this further present decline from past rates.  They are not just pushing a rope they are authoring the very deflation they are trying to prevent. The Fed is powerless. The only thing they know is to pour more gasoline on the deflationary fire. Idiots.

This auction means the deflationary spiral is gaining speed and we are watching capital destruction in action.  Who in their right mind is going to invest in capital in a perpetually declining rate environment?

And I also disagree, Aziz...  we know EXACTLY how this is going to end...  As capital destruction and deflation continues, tax receipts will suffer, and without any drastic cut in spending, the USA will need to come to the bond market more and more. Rates will want to increase, which will force the Fed into more and more OMOs. Eventually the bond market will revolt against the devaluing dollar and the tower of debt and then it is Game Over.

But not just Game Over for the Treasury market. It will also be Game Over for the Physical Gold market!  Physical Gold will not be obtainable for ANY number of worthless chits.  Permanent backwardation.

Buy your Gold NOW... while markets are still accepting fiat for metals. Once the SHTF, Gold will go into hiding.

Aziz's picture

I think that's a reasonable forecast (though I disagree that this is risk free — it's actually incredibly risky for everyone involved — trying to impose price floors always is, there's just no inherent value in it) but let's not ignore the geopolitical dimension.

A lot of people in Washington believe Krugman when Krugman says "WW2 ended the depression". There's a fairly large chance they will try and inflate our way out in a war economy. 

Solon the Destroyer's picture

Sorry, Mr. Aziz, agreed on that basis. They do have a couple of policy alternatives, a shooting war probably being the most drastic.

But I find it highly unlikely that they will attempt a shooting war when:

1. It's an election year

2. With massive debt problems (and even moreso in Europe, and a shooting war would require European support, which will not be forthcoming)

3. The UN calling for peaceful alternatives in direct contrast to American rhetoric. There's not a lot of political will there.

The 2nd point would likely mean hyperinflation (on a QTM basis) as the US attempts to pay for that War. 

War would also give Russia the upper hand in the global economy.  Since they have ample gold, oil and nat gas, they will benefit far more than the US when those commodities skyrocket. JMHO.

There really is no way out of this mess other than opening the Mint to Gold, and despite that being the only true solution, they won't take it. It would mean decades of the establishment being wrong.  They'd rather crash and burn than admit their mistakes and give up their power.

Aziz's picture

There's an additional consideration here. Not only is the USA economically depressed, but it is gradually becoming weaker as its rivals become militarily and geopolitically stronger (the US used to have a massive advantage in having a free market capital allocation process, but not so much anymore, so it's fairly clear why the US is losing the advantage). 

So the key thing is, if they don't have a war or proxy war soon, they will be in relatively weaker position to have one in the future. This is a pretty strong incentive to go out and have a military-Keynesian war (or more likely proxy war) in the near future. The hope being to advance American dominance in Eurasia and turn back the tide of Russian and Chinese influence.

Ironically, the one thing that the USA needs to increase its strength and influence— market-based capital allocation and all the development and innovation that that brings — will be DECREASED by a war (war is, by definition, capital misallocation).

Solon the Destroyer's picture

The USA's military lead on its rivals is so great, this won't be an issue for decades, even if the US cut their spending by half right now. 

And capital allocation for military spending has always been done on a socialist/command basis even during more free market times, so I don't see it's relevance.  War is essentially a socialist/command enterprise.

Not to mention capital misallocation in the economy began with the Versailles Treaty and has further intensified since Roosevelt and then the Nixon shock with little perceivable detriment to the crypto-military complex. Spending in this area has only increased and become less transparent.

Not to mention their rivals are suffering from the same issues of misallocation.  Easing is a global phenomenom not an American one,

I don't see the century long capital misallocation in the global real economy as an incentive to War by the USA today.

Solon the Destroyer's picture

I fail to see the risk though in front-running the Fed though, Aziz. The Fed is forced to buy these bonds back. There is no risk they will not. They've been doing it for 30 years. They are the ultimate backstop to the bond market.  Yields can drop ad infinitum (you can halve something to infinity).




Solon the Destroyer's picture

There is virtually zero risk for the short period of time that the speculators are holding this paper. They are flipping it to the Fed as soon as they can. Not to mention as the world crumbles, US$ will strengthen in the flight to safety (until it too crumbles under the weight of US debt). The speculators know they have time. There is no risk to their front-runnning.

Aziz's picture

You seem like a smart guy, but "there is no risk" — especially in an irrational multi-dimensional system, where there are lots of variables, and where we are even uncertain of a lot of cauality — is a dangerous thing to say.

Solon the Destroyer's picture

Oh dude, certainly risk exists in the general economy.

But there is no risk at present to front-running the Fed. Dealers can game the system in both directions and do. And there is only one variable that matters--will the Fed continue to provide a bid to Treasury paper. And you and I both know they will. The Fed telegraphs its intentions and does this so that there will always be a bid in the primary treasury market*. This was the trap they created for themselves when they went off Bretton-Woods. Did you read either of those papers I linked?

Besides, you must admit even if you deny "no risk", that the risks are far greater in the commodity markets than they are in the Treasury market. We know the risks are far greater in other currencies. We know the risks are far greater in corporate bonds and in equities... And obviously in the general economy too, whether in business investment, real estate, whatever.

*and also because they themselves are limited to the secondary market. They could pre-empt the front-running by buying directly from the Treasury in the primary market, but that would be end of the dollar and they know it.

AUD's picture

You are effectively treating the credit of the Federal Reserve bank as risk free. Sure the Fed can, & will, bid US Treasuries to zero all along the curve, but priced in what? Its own credit is the answer. No credit is risk free.


ich1baN's picture

Europeans and other worldlies won't flock to US treasuries if and when the FED decides to print $2 Trillion.... Sure in the short run it appears to be riskless and is b/c the effects of the massive debt to GDP have yet to take their psychological toll..... The only other thing other than world-wide fear that is propping the dollar up is its redonculous reserve status..... and that is losing credibility day by day as Japan, SK, Brazil, and now Aulstralia are ditching it for direct trade. 

I give your analysis credit for maybe 2 or 3 more months until the lemmings realize there is no safe currency except precious metals. 

fnordfnordfnord's picture

For that trick to work. You need to bomb a continent to smithereens; so you can later sell them all the stuff needed to rebuild it.

aerojet's picture

You had me right up to the gold part, then you revealed yourself.  I find it hard to believe that gold goes into hiding since someone, somewhere, will have to sell it to obtain currency with which to buy necessities.  Unless you think you will be able to shave of a hunk of gold from one of your bars to buy things directly with it.  I seriously doubt that will ever work. 

The Fed is not powerless--they can withdraw liquidity and they can raise interest rates.  You should not underestimate whatever other tactics will be employed.  Just when you think you have it all figured out is when the people who really know what they're going to do pull the rug right out from under you.  I'm absolutely certain that precious metal holders are going to seriously regret their investments.  The Fed blows bubbles and creates bagholders who take huge losses and holders of metals will be those bagholders, watch and see.

Bay of Pigs's picture

Gold up 12 years in a row. Yeah, big regrets I dont have more.

i-dog's picture


"Unless you think you will be able to shave of a hunk of gold from one of your bars to buy things directly with it."

That is exactly how it is done in broken economies with barter trade! Only gold has universally recognisable value and it is traded in fractions of a gram for necessities. The guy on the back of the HiAce has digital scales.

steve from virginia's picture


The Treasury owns gold, it's hard to see it become anyone's bagholder.

The Fed does indeed have 'tricks' up its sleeve, all of them make things worse.

If currency is worth more (relative to debt) it will disappear from circulation as it is hoarded: it will become 'gold-like'.

If currency is worth less (relative to debt) it will be substituted for by something else (ration cards, barter, tokens, 'junk' coinage, private scrip issues and local currencies). The establishment seeks to depreciate currency to force taking on of new debt to service and retire maturing debts. This is almost impossible like putting a piano into a room by forcing it through a keyhole!

There must be a better way.

Enough currency to have any effect on these massive legacy debts would = completely undermine what the effort seeks to accomplish.

What will take place instead is repudiation and deleveraging. Left to its own devices the outcome is complete institutional insolvency including that of the governments. Voluntary restructuring, forensic analysis of the debts and selective repudiation is the only way from here and time is running out for that. It cannot be done in the eurozone right now b/c there is no institution on the Continent with the credibility, even in Germany.


All of this is likely going to have to burn itself out ...

Axenolith's picture

I find it hard to believe that gold goes into hiding since someone, somewhere, will have to sell it to obtain currency with which to buy necessities.  Unless you think you will be able to shave of a hunk of gold from one of your bars to buy things directly with it.  I seriously doubt that will ever work.


 Heck, crap hasn't even hit the fan yet and I just bought a shooting harness at a significant discount with 2 silver eagles...

Bill Shockley's picture

You are high.

I owe money on my house. When gold inflates I plan to pay my bills at the bank, give me money.


Jesus, what else, oh ya idiots, pay my taxes.

Think I will need money.

Sheeple are one thing, gold fish are another.


AlaricBalth's picture

When the Treasury Bond bubble bursts it is going to be remembered in infamy!

Negative yields after inflation.

I once voluteered to help combat a rather large forest fire in Colorado. What amazed me is how the winds were rushing into the direction of the conflagration. The fire was so large, its need for oxygen created 50 MPH winds. When the Treasury Bond market starts to burn, it is going to suck up all capital it can. Uncontrollable!!

ITrustMyGut's picture

Jim Willie spoke to this about a month ago, as well as plenty of ZH articles...


bond bubble is the final.. the MOTHER of all bubbles... 1.5% is THE BLACK HOLE..consuming all monies.. ALL.. DEATH to any other actual real funding needs...the BLACK HOLE will consume all available..

Solon the Destroyer's picture

The Black Hole of Zero Interest is a construct of Professor Fekete's.  I know he wrote about it publicly in 2010, but there may be other papers prior to that one that I have not yet read. Certainly he was teaching it by then.

Fekete points out that this is not a Dollar Crisis, this is a Gold Crisis!

aerojet's picture

It's neither--it is a crisis around too much paper chasing too little hard goods.  Gold is one of those commodities, but it isn't the only one. 

earleflorida's picture

ah yes, mother nature... whom just happens to nurture reality

well spoken AlaricBalth

financial apocalyptic contagion's picture

they always come back for promises of more toilet paper in the future

timbo_em's picture

Out of the money market and into a 10 year bond...isn't that a bit of a stretch? My bet would be on collateral issues.

J 457's picture

FED should raise rates .05% to flush this bond money back into equities.  They tried lowering rates to produce growth and failed, time for reverse QE tactic.

Peter K's picture

Well, someone was buying Eurotrash debt and CEE for the last couple of days, with some other persons money:)

Ben, hasn't posted the Euroland swap lines totals in quite a while.

And now this.


Is Dr. Krugman in the house?

Burr's 2nd Shot's picture

Winning the Future auction?  Sweet!

EscapeKey's picture

Marketwatch's chart looks rather odd


Oh I know - Fat finger! Fat finger!

firstdivision's picture

That is becuase they are trying to be first in showing hyperinflation.


It would be funny if there was some crappy algo out there that used MW as a data feed. 

DCFusor's picture

There are a few over there on MW who are so consistently wrong you could make a good algo just negating their suggestions.  It's the random inputs that are hard to work with, not the consistent ones.