Thursday, January 14, 2010

Mystery Bidder for Treasury Securities

There has been strong bidding for Treasury securities in recent auctions.

Of note, the buying is coming via direct bids. This is a bit unusual. Who's the mystery buyer, when all the world thinks interest rates are headed higher? Conspiracy theorists will point to the Fed or the Plunge Protection Team. At this point, with not even circumstantial evidence pointing to anyone specific, we will hold our fire on speculating just who might be behind this mysterious buying. It's a big world and there could be lots of reasons a hidden buyer might be out there.

But the curious buying should be noted. Here's FT Alphaville with the details:
Well someone is buying US government debt, despite prominent prognostications as to its worth(lessness). The problem is we don’t know who.

Wednesday’s auction of $21bn of 10-year US government bonds saw reasonably good demand, with a bid-to-cover ratio of three times and a yield of 3.754 per cent, about the level anticipated by the market. The most interesting auction statistics, however, are the breakdown of buyers.

Bidders in Treasury auctions fall into three categories: indirect (usually foreign buyers), primary dealers (the official trading partners of the Federal Reserve) and direct bidders (non primary dealers bidding on their own accounts, i.e. institutional investors like hedge funds or bond funds).

And on Wednesday, direct bidders accounted for 17 per cent of the total bonds sold, the highest percentage of direct bids in a 10-year Treasury auction since May 2005, and very much above the recent average of about 5.6 per cent. Indirect bids accounted for 29 per cent of securities sold, versus an average of 44 per cent in all the 10-year sales in 2009, according to data from Monument Securities.

And Wednesday’s auction is not alone in a change of bidder breakdown.

Tuesday saw a $40bn auction of three-year Treasuries with direct bids accounting for a record 23 per cent, compared with an average of 6 per cent at the past 10 offerings. Indirect bidders purchased 38 per cent of the bonds, compared with 51 per cent on average.

Something is going on, either there’s been a shift in the structural demand of wants US debt, or a big, single buyer has been very active.

Here are some thoughts, via the FT:

Market participants say the unusually high level of direct bidding suggests that a large investor is looking to accumulate Treasuries without alerting the primary dealers on Wall Street to its intentions.

“It appears to us that someone is trying to hide their apparent interest in owning these auctions from the rest of the market,” said David Ader, strategist at CRT Capital.

Rick Klingman, managing director at BNP Paribas, said: “It is unusual to see such a spike in the direct bid and I would imagine it is one big bidder. There is no way we will find out who it is, not now, or ever.”

1 comment:

  1. Is this just one reason why Bernie fought tooth and nail to stop Ron Paul's Audit the Fed bill?

    If the Fed operates in this clandestine way to prop up govt borrowing (in the hope people will think the sales suggest wider public support for govt borrowing) then they would hardly want to be put in the position that Cngress et al could see what they are doing.