On Wednesday, the US Treasury offered 16 billion of 30-year notes. The auction was nearly a disaster. To fully understand why you need to understand how a debt auction works.
.
There are basically three types of entities that purchase debt from the US Treasury:
.
1.) Direct Buyers – these buyers are anonymous and can’t be tracked. They buy straight from the Treasury and typically take very small stakes.
.
2.) Indirect Buyers – these folks typically acquire very large chunks of US debt. The conventional wisdom is that the Indirect Buyers fairly represent foreign governments (China, Japan, etc.) and is a good proxy for foreign demand.
.
3.) Primary Dealers – made up of 18 banks and securities operations that do business directly with the New York Fed. Primary Dealers MUST buy to ensure an auction doesn’t fail. Sort of like market-makers on the NASDAQ. You don’t want to see Primary Dealer purchases because that means that those who have a choice in the matter chose not to buy.
.
Indirect Buyers must notify the Primary Dealer in advance of their intentions, and they typically go through the Primary to make their buys because they can leverage the relationship between the Primary and the Fed to ensure they get the amounts they desire.
.
Let’s break down Wednesday’s action and you’ll see how this could get out of hand pretty quickly:
.
Primary Dealers: 47%
.
Direct Buyers: 24% (this is an all-time record for Direct Buyers)
.
Indirect Buyers: 28%
.
To put these numbers in perspective, the average Indirect Buyer participation for the last four long-term auctions was 39.9%. To see a slide in Indirect participation from nearly 40% all the way down to 28% is alarming, to say the least, because it means that the foreign appetite for US long-term debt is rapidly deteriorating. Another red flag here is the record participation from direct buyers (remember – for all we know this was the Treasury or other agency buying, as Direct Buyers are anonymous). Indeed, we know that the Treasury absorbed 11% of the total auction, hardly what I’d call a robust auction.
.
This is a bright red, flashing warning sign, because this is exactly what an auction looks like when a country is about to enter a debt spiral. What we’re looking at is one of two possible outcomes (or both, perhaps): rapidly rising rates or inflated currency. Not to mention the fact that we will very probably have to bail out California (estimated 500 billion in debt) in the very near future.
.
Guest post by Cato the Elder
![[Post to Twitter]](http://www.tooconservative.com/wp-content/plugins/tweet-this/icons/tt-twitter.png){kind=icon}
Feb 12th by Guest Poster
thank you for this explanation. now that i know that 40% foreign participation is the “benchmark”, i can judge how unattractive our debt is becoming on the world market.*****
but, Obama (& the entire Congress, but mostly Dems) just keep spending & spending & spending.
Very good guest post, Cato! Our financial system is falling further and further into disrepair. This is sad news indeed.
With all the free spending by the Congress and this Administration,I think most business people and general investors have expected a future with significant inflation at some point. The only question was when not if. We also must not overlook the contribution to this looming scenario of the previous Administration and the huge amounts from the FED. Good post CATO. The main thing that allowed us as a country to go this long is that the rest of the world’s governments, except for a few, are also spending beyond their means. So we all go down together. When will China call their notes?
“When will China call their notes?”
*
There’s already discussion about this in the senior PLA ranks: http://macedoniaonline.eu/content/view/12333/53/
“Republican Rep. Joe Wilson created waves that left Washington rocking for weeks by shouting “You lie” to Barack Obama during the president’s address to Congress last fall, and now a similar message has been delivered by a member of the president’s own party.
Sen. Jay Rockefeller, D-W.Va., told an audience today the president is “beginning to be not believable to me.”
The comment was just the latest evidence of the dissension in the Democratic Party that prevented Obama from passing his health care proposal last year despite having a significant party majority in the U.S. House and a supermajority of 60 votes in the Senate.”
Even conservative democrats are creeping off and away from this dipshit and his administration. Watch for more defections… You think all of this “proof” that they don’t and can’t grasp what they need to isn’t going to fuel a conservative resurgence?
My favorite part of the Superbowl was the two advertisements in front of a record number of viewers that pointed out that China is in position to “own” us.
monk, you are the best. and totally O/T: look at PPP polling in 5th CD: my man, state Senator Robert Hurt is in a dead heat with obama/pelosi-enable Perriello (dem). and Robert Hurt hasn’t even won the nomination yet!
We’ll have to channel some money down there for the race!
Cato
This is an obvious red flag to everyone on the planet with the exception of President Hopey Changey, 75 % of Democrats in both houses and about 40% of Republicans. This a very dangerous combination. This abministrations economic team is possibly the worst in our nations history.These people are going to ruin our economy and then blame everyone other than themselves when it happens.
Interesting post! Here is a link to an article on the subject.
http://www.businessweek.com/news/2010-02-11/treasury-futures-are-near-one-week-low-before-16-billion-sale.html
Of note, you can make money off reckless fiscal policy buying inverse treasury ETF’s. Two of my favorites are TBT (200% levered) and TMV (300% levered). Both are extremely volatile and vulnerable to geopolitical events so proceed with caution.
*
I’ll be donating all the profits I make from shorting America to whomever the opponents of Perriello and Connolly end up being.
Cato, this was a great post. Very interesting, as I’m not as familiar with debt auctions as I should be.
[...] PAST TIME TO PUT THE BRAKES ON TAXING AND SPENDING February 13, 2010 Leave a comment Go to comments Cato the Elder has a post at Too Conservative that is worth checking out, The Anatomy of an (Almost) Failed Treasury Auction. [...]
The ticker symbol for the play on this is TBT, look it up on http://www.proshares.com. Its ultrashort 20 to 30 year treasury bonds.
“The ticker symbol for the play on this is TBT”
*
Some cautionary words here: 1.) Don’t run out and buy TBT tomorrow, pressure on the Euro in the near term will be favorable to t-notes. You need to let the Eurozone stuff run it’s course before considering pulling the trigger. 2.) Never hold these positions overnight or over the weekend. Israel could bomb Iran overnight and the next day you’d get your head handed to you as people take risk off en masse. 3.) Personally, I play this going into an event like a 30 year auction. The best time to make a directional bet is 3-4 days ahead of an auction, then sell right before the actual event (why take a chance). For example, you made 10% if you entered TBT 4 days before the last auction. Not bad for 4 days work.
Cato, your points are well taken and your strategies are well informed, though you are a little quicker on the trigger than I, perhaps since I mostly buy it as a hedge. TBT is short term holding, never buy without having a sell strategy in place, and all the usual rules about diversification apply.
Cheers!
Both parties have amply proven themselves to be incompetent and unprincipled when it comes to economic and fiscal policy. So I draw no partisan conclusions from it. However, the post is interesting and insightful. Thanks, Cato.
No partisan bias intended. If anything, we Republicans should focus on what we can influence leading into 2010 and 2012: namely cleaning our own house. Did you happen to get a load of that “bipartisan” jobs bill before it got killed? Disgusting.
*
* $27.5 billion for roads and bridges
* $8.4 billion for public transit
* $800 million for Amtrak
* $500 million for airport improvement projects
* $100 million for maritime interests
* $2.1 billion in Clean Water funding
* $715 million for Army Corps of Engineers projects
* $2 billion in Energy Innovation Loans
* $4.1 billion in School Renovation Grants
* $1 billion for the National Housing Trust Fund
* $1 billion for the Public Housing Capital Fund
* $23 billion for an Education Jobs Fund for states
* $1.18 billion for law enforcement jobs
* $500 million for firefighters
* $200 million for AmeriCorps
* $500 million for Summer Youth Employment programs
* $300 million for the College Work Study program
* $270 million for Parks and Forestry Workers
* $750 million for competitive grants in “High Growth Fields”
* $41 billion to extend expanded jobless benefits for six months
* $12.3 billion to extend COBRA health insurance aid for jobless workers
* $354 million in Small Business Loans
* $2.3 billion in expanded Child Tax Credits
* $305 million to keep certain people eligible for federal aid programs
* $23.5 billion to extend a higher federal match for some Medicaid payments to doctors
*
Note the amount set aside for small business, out of a 150 billion dollar bill. Guys like Grassley and Shelby shouldn’t get a pass simply because they have an (R) next to their names.
[...] is a follow-up to this post where I discussed the mechanics of debt auctions and highlighted a recent near-failure. [...]