Charting The Indrect Bidder Hit Ratio After Today's 100% Result, And Anticipating A Surge In Brand New SFP Issuance

Today's 4 week Bill auction was unique in that the hit ratio for the Indirect Bid hit a record (and an inability to go any higher) at 100%. We have charted the hit ratio over the past 3 months, where aside from the window dressing auction from December 29, the average ratio has been at 68% (69% including that particular 97% hit ratio auction).

The implications from this result: the Indirect bidders put the greatest amount of 0.000% or as close to preliminary bids as possible (remember, this means bidding at the highest actual bond price), followed by directs and primary dealers as we approached the 0.055% stop out to fill the $31 billion reverse dutch auction. Yet the hit ratio has never been 100% before (or at least not according to our data). This means that indirects are not price fishing, trying to jigger the auction with low ball bids: they are simply reducing their absolute nominal exposure to the Bill space, further confirming the TIC data which showed China is now happy to let its Bills expire without rolling . We expect an increasing amount of 100% hit ratio Indirect bids in Bill auctions in the future, as the full amount of Bills tendered progressively declines, forcing Primary dealers to take down 80% or more of all future Bill auctions.

And in other news, now that we can stop all pretense about fiscal responsibility courtesy of the just increased debt ceiling, the Treasury just announced that it is increasing the balance of its Supplmentary Financial Program to $200 billion, which will be promptly filled by 8 sales of $25 billion 56-day Bills over the next 8 weeks. The SFP program, which was previously unwound to a mere $5 billion, will now be used to raise an incremental $195 billion in debt to fund the burgeoning deficit. A Treasury official was quoted as saying: "We're committed to working with the Federal Reserve to ensure they have the flexibility to manage their balance sheet." Since the Fed has the printer, we are committed to believing that whatever the Fed does will be in the dollar's best interest. The beatings to increase morale, as well as the 8 SFP sales, will commence promptly tomorrow and continue until mid-April.

This SFP news is relevant because today's Indirect Hit Ratio demonstrates that the "sales" of $195 billion in new SFP bills will merely go to Primary Dealers and whoever the increasingly less mysterious Direct Bidder is, as Indirects phase out all Bill interest altogether.