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Another Record Direct Bid Award In Today's 7 Year Auction

Tyler Durden's picture


When we commented on yesterday's 5 year auction, most remarkable for a surge in 5 Year Direct awards to a stunning 30%, which in turn followed a record low Indirect takedown, we wondered if "there some major shift in the underlying dynamics for US paper based on these recent results? You bet. What is said shift? We hope to find out soon enough." Today, we still can't confirm what the reason for said shift is, but we can certainly confirm that the same pattern continues, as the US Treasury just sold its monthly $29 billion allotment of 7 Year paper, at a high yield of 1.233%, well above November's 1.05%, and a bid to cover of 2.72, just below the TTM average of 2.75, but the most notable feature was that just like yesterday, the Direct award was the highest in series history, at a whopping 23.11%, and above last month's 19.71%, which also was a record. There is a distinct shift in awards to Direct bidders, especially with PDs getting just 37%, the lowest since December 2010. Just who these bidders are, and is this merely a year end window dressing phenomenon, seen periodically when money managers need quality collateral for year end purposes, remains unclear. Keep an eye on the Direct bid in the January auction to see if the trend persists. If it does, it may be time to ask some questions.

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Wed, 12/19/2012 - 14:30 | 3079533 malikai
malikai's picture

Yeah, well, somebody's got to buy that shit.

Wed, 12/19/2012 - 14:38 | 3079575 economics9698
economics9698's picture

Japanese too broke to buy? 

Wed, 12/19/2012 - 15:51 | 3079905 CPL
CPL's picture


They'll be back around after they print another 12 trillion Yen from their own bond auctions, then they can buy the US IOU's with their IOU's.


Funny how the people with money aren't even considering touching any of that substandard "investment".

Wed, 12/19/2012 - 14:32 | 3079540 vote_libertaria...
vote_libertarian_party's picture

Smells like China being reclassified.

Wed, 12/19/2012 - 14:38 | 3079582 praps
praps's picture

It does.  As of May, China became eligible to be a Direct bidder.





Wed, 12/19/2012 - 14:40 | 3079594 LawsofPhysics
LawsofPhysics's picture

Yes, this was done in order to hide their lack of bids.  The elite around the world are looking forward to everyone working for chinese wages.

Wed, 12/19/2012 - 15:03 | 3079695 TruthInSunshine
TruthInSunshine's picture

All the central fractional fiat banks (aka "Fiat Printers") are buying each others' debt in one big, wet, disease-laden circle jerk.

It's absolutely Ponzi-riffic.

Wed, 12/19/2012 - 14:33 | 3079548 Squid Vicious
Squid Vicious's picture

yawn... what time does today's robot ping-pong ramp-fest start?

Wed, 12/19/2012 - 14:34 | 3079555 1100-TACTICAL-12
1100-TACTICAL-12's picture

wish i undestood the bond market better. cliff notes for this article anyone?

Wed, 12/19/2012 - 14:38 | 3079573 SheepDog-One
SheepDog-One's picture

Bawnds never made any sense at all to me in the first place, and even less these days when the goobermint is bankrupt yet promising to repay money and people scramble for it? I Just. Dont. Get. It. 

Wed, 12/19/2012 - 14:49 | 3079632 economics9698
economics9698's picture

1100 Tactical-Basically the demand for US paper has declined and the cost of borrowing went up.  Most of the time it is just “noise” or the bond market always goes up and down, just like all markets.  Every so many months, or years, there is a big movement up or down and traders do not want to get caught behind.

For bonds if you own late issue low interest bonds and the market shifts into higher interest offering bonds then the value of your low interest bonds plunges and you lose substantial amounts of value for your bonds which you must now sell at a discount to compete with higher interest bonds.

If the primary dealers, they buy the bonds and sell them to the Fed, think higher interest rates are in the immediate future they will not want to be stuck with a bunch of low interest bonds that they will lose money on.

It is a game changer if this pattern persists.

It changes the pattern of the primary dealers buying bonds from the treasury and selling them to the Fed at modest profit levels.  Now if interest rates are climbing for the foreseeable future primary dealers will change their buying patterns to avoid losses.

It is almost impossible to see these shifts, I predicated September 2013, but who knows?  If you can guess right millions await you.


Wed, 12/19/2012 - 15:04 | 3079593 French Frog
French Frog's picture

Same here!

Please, can someone write down what questions he/she is refering to or at least what train of thought is in motion based on these last 2 auctions. Cheers

Edit: thank you 'economics9698' & 'govttrader'

Wed, 12/19/2012 - 14:48 | 3079628 hannah
hannah's picture

i can explain the entire bond structure easy oeasy...it is a big scam. the fed  and treasury just print as much as they think they can get away with every day. simple. all the 'analysis' is just wanking as there isnt any real market under it.


it is just a scam...

Wed, 12/19/2012 - 15:01 | 3079662 govttrader
govttrader's picture

When the US treasury issues new debt (borrows money from the rest of the world), they do it via auction.  The bidders in the auction are lending the US govt money in exchange for an IOU + interest.  There are 3 groups of bidders in the auctions. 
1)  PD (primary dealers -these are the investment banks that try to buy the bonds in the auction cheap (a tail) and then try to flip out the bonds in the secondary market).  Usually, the dealers go into the auction short, and buying in the auction is a potential method of covering that short.
2)  Indirect Bidders - these are bidders who do not have direct access to the US Treasury...so they submit bids through the primary dealers.  In exchange for providing this "bidder service," the PD investment bank knows what their customer is bidding for (how many bonds and at what price).  While custonmers ould spread their bids out among several PDs, that can be cumbersome...but still an option.

3) Direct Bidders - these are end users just like the Indirects, except they do have direct access to the US Treasury to bid for bonds in the auctions.  Large market participants (Central banks, pension funds, large hegde funds, insurance companies, large bond funds like PIMCO) have the option of either bidding direct or indirect.  If you want to bid direct, there is a non-trivial application....you have to be large to be able to bid directly.


There are 2 main advantages of bidding directly, vs indirectly through a PD.
1)  when bidding direct, no PD knows what you are doing...which makes it harder for the PD to game the auction.
2)  when bidding direct, the Treasury knows what you are bidding for (when you go indirect through a PD, the bids show up in the PD's name).  So, if China wants the US Treasury to know that they are participating in our debt auctions, they go direct.  Yes, they could go indirect through a PD and just explain that they did so, but going direct is a more "official type of statement."  Only the US treasury knows who bid "direct."

If you were china, and you were going to bid for 1/3 of an auction, you wouldn't want a PD to know this info, because the PD would then try to front run you in the auction (and that is totally legal).  No guarantees here, but trading bonds is a game of statistics...so why put yourself at a disadvantage.  China does trade their US Treasury holdings around (it takes them a few days / weeks to make a significant position change...but they do it)

So, now that you know the basics...there is a game to play.  If you think the biders for an auction will in general be bidding for less than the price in the secondary market, then you would sell bonds in the secondary market and then bid for them in the auction and try to make a quick profit.  If you think bidders will bid a higher price than the current price in the secondary market, then you will go into the auction long (buy your bonds in the secondary market and ignore the auction).  The secondary market tends to "reprice" to the auction price immediately after the auction for a hort period of time.



Wed, 12/19/2012 - 15:42 | 3079874 mirac
mirac's picture

thanx for your explanation...

Wed, 12/19/2012 - 15:56 | 3079924 economics9698
economics9698's picture

There is a trend.  China stopped buying in July 2011.


Wed, 12/19/2012 - 15:42 | 3079877 Darksky
Darksky's picture

Thanks for the info. This is why i love me some ZH.

Wed, 12/19/2012 - 14:34 | 3079559 Cognitive Dissonance
Cognitive Dissonance's picture

"If it does, it may be time to ask some questions."

The time to ask questions is over. It is now "Women and children to the lifeboats" time.

Wed, 12/19/2012 - 14:40 | 3079585 LongSoupLine
LongSoupLine's picture

Ohhh, sooo sorry Cog, lifeboats are already filled with Goldman and JPM elite...



However, we have this nice band on the promenade deck for your sinking enjoyment.

Wed, 12/19/2012 - 15:00 | 3079682 Cognitive Dissonance
Cognitive Dissonance's picture

That would be nice.....only I'm locked down here in 4th class steerage. Got a can opener by chance?

Wed, 12/19/2012 - 14:37 | 3079567 PUD
PUD's picture


ShopperTrak cut its holiday season forecast to a 2.5% increase in November and December, down from its original projection of a 3.3% gain in September. It was the first time in the firm’s 15 years of predicting holiday sales that it cut its view midseason, Martin said in an interview.

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ShopperTrak’s numbers show sales and foot traffic in the week ended Dec. 15 were down 4.3% and 4.4% respectively, while ShopperTrak had expected both measures would increase with less than two weeks to go before Christmas. Traffic and sales also were down in the week ended Dec. 8

Wed, 12/19/2012 - 14:39 | 3079580 LawsofPhysics
LawsofPhysics's picture

One step closer to control over all the debtor's assets once they default.  Money is an illusion and bankers do not know how to actually create anything of real value, so they gotta keep that usury coming at all costs. 

Wed, 12/19/2012 - 14:40 | 3079590 HedgeAccordingly
HedgeAccordingly's picture

funny stuff.. epic move off lows this morning... 

Wed, 12/19/2012 - 14:51 | 3079605 LouisDega
LouisDega's picture

I loves me a good auction


Wed, 12/19/2012 - 14:45 | 3079615 Dr. Engali
Dr. Engali's picture

The way I read it China is using it's direct window to the treasury.

Wed, 12/19/2012 - 14:55 | 3079653 Winston Churchill
Winston Churchill's picture

Chinese holdings of UST's are going down,not up.

From a rough calculation  by the same ammount as their "reported" gold


Seems to me the PBOC is getting a special price on gold in a backdoor deal not

to dump UST's publicly.Just a guess, but they got their RMBS portfolio bought back

at par in 2009 by the FredRes,so theres history behind that guess.

Wed, 12/19/2012 - 15:22 | 3079774 TruthInSunshine
TruthInSunshine's picture

I'll take the other side of your general thesis and state that while Europe is in contraction (France is in deep trouble, the kind that the financial press has yet to accurately speak of), and the U.S. is also in real contraction (one can't rely on massively manipulated GDP prints that depend on the Fed's tsunami of liquidity, which distorts all measurements), China has the biggest current bubbles and pockets going now in terms of asset valuations intra-nation, and China's future course will vindicate Jim Chanos.

Wed, 12/19/2012 - 15:38 | 3079857 Winston Churchill
Winston Churchill's picture

A major reset is coming.Whoever is left standing with physical assets wins.

Unbacked fiat currency will not show its head again for several generations.

I'm talking a tactical move I think is being used by by China  to get their money

out of junk UST's just as they got out of junk RMBS.

Doesn't really matter if China is in an asset bubble ,they have the

productive assets now ,not us.We are reliant on worthless fiat financial 'assets' having

given away the physical ones.So which is the real bubble here ?

Wed, 12/19/2012 - 15:14 | 3079739 metaforge
metaforge's picture

Printaz gonna print.

Wed, 12/19/2012 - 15:27 | 3079799 yogibear
yogibear's picture

Oh, who is the bearded one in the background buying all the US treasury debt? It looks like Bubble Bernanke.

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