This is a topic we have touched upon in the past so we won't dwell much on it: last Primary Dealer Bid to Cover in Tuesday's 52-Week Bill Treasury auction: 6.0x ($15.6 billion allocated to $94.7 billion in tendered bids); Bid to Cover in the just completed reverse POMO in which the Fed sold $8.870 in Bills maturing between August 2012 and March 2013 to $204 billion worth of interest? 23x. The Fed is once again four times more efficient than the Treasury at peddling US paper. Surely that is only to appease Brian Sack and not because there is million in free money to be made on the flip.
Expect to see yet another spike in PD 1-3 year Bill holdings when the New YOrk Fed reports the latest PD holding data next Thursday. Why did this happen? We won't regurgitate and merely repost what we wrote last time.
How is this possible? Is the Fed really 4 times more efficient at selling bonds than the Treasury? How and why can dealers have such a huge apetite for paper which yields inside of 0.1% and thus provides absolutely no real top or bottom line benefits?
Simple. As Zero Hedge has discussed many times in the past, POMO, in whatever format, be it under LSAP auspices or Operation Twist, is nothing but a taxpayer funded gift to the Dealer community. As a reminder, the actual POMO process is conducted in the form of a reverse dutch auction, where the collusive Dealer Community (recently expanded to include 2 more Canadian Banks, BMO and Bank of Nova Scotia, which simply means that US Taxpayers are now on the hook to bailing out two more banks which are part of the supposedly safe and stable Canadian banking system) submits best bids or offers to the Fed, depending on whether the community is buying or selling bonds. Today, for the first time, it was buying, so it was Bidding. And while we can not prove it as the actual details of the price allocation are a non-public mystery, we are 100% confident that the answer lies precisely in the risk-free arbitrage, funded by the Fed, and hence the US taxpayers, consisting of a collusive wholesale bid at prices far lower than prevailing market rates, and the ability to immediately flip the bonds to the open market upon allocation for a tidy profit.
How tidy? We have no idea: the data is private. However, it is tidy enough to generate 4 times more buying interest than would be there normally. Hence the, pardon the pun, twist.