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Did Wall Street Flip Off Treasury Today?

Posted by Larry Doyle on March 25, 2009 4:55 PM |

The U.S. government was heavily involved in the bond market today. How did they do? They bought high and sold low. What happened?

The Fed announced last week that they would engage in buying hundreds of billions of government and mortgage securities in an attempt to move interest rates lower and spark consumer and corporate borrowing. Today, the Fed made their initial purchase under this program at mid-morning. Thanks to MB, I learned that Wall Street offered the Fed three times more bonds than it actually purchased. I gather that the Fed wanted to be extremely patient and diligent in their purchases. In any event, at mid-morning the Fed would have bought bonds near the market highs of the day.

Later in the day, Treasury issued multiple billions in 5yr notes. How did they do with this sale? Not very well. Wall Street backed up their bids an almost unheard of 5 basis points (.05%) to fully underwrite these bonds. What happened?

In talking with a few friends (thank you, gentlemen), speculation is that Wall Street backed their bids up by 5 basis points (total cost to Treasury of a not insignificant $78 million) for three reasons: 

   1. Concern that the Fed did not buy more bonds in the morning;

   2. Concern over a failed 40 year U.K government bond auction. This failed auction highlights the overwhelming supply coming to market across global government markets, as well as the fiscal problems in the United Kingdom. (please see my earlier post/video clip today: Daniel Hannan Skewers Gordon Brown.)

   3. Strong speculation that Wall Street was sending a clear signal to Treasury in response to proposed legislation taxing Wall Street executives at rates of 70% to 90%.  Message delivered being that Washington needs Wall Street just as Wall Street may need Washington.    

Don’t think that a situation like that could not happen. There is always pre-auction talk about potential strength or weakness of upcoming auctions. If word was getting around that an auction was expected to tail (go poorly), it often can become a self-fulfilling prophecy without it being a coordinated conspiracy.   

The WSJ reports Weak Auction Sinks Treasurys .


  • mb

    I think you hit on a couple of great points. If Treasury and the Fed want to make an impact, it’s better to do it quickly. Their program was set up with a 6 month timeframe. As today shows, maybe they should go “all in” (excuse the poker phrase) to get some help rather than do it piecemeal. You can’t have your cake and eat it too…..

  • Larry Doyle

    MB…thanks for commenting. The greater the time lag, the greater degree of uncertainty and risk. Perhaps the crowd in washington knows how long it will take the economy to turn so they are trying to talk the market up while patiently trying to hold it up as well.

    Visit and comment often!! Thx..

  • TeakWoodKite

    LD, how many years has the Treasury been beholden to those institutions that buy in bulk? If the incentive to by these notes, what happens to the stability of the market near term if this continues?

  • TeakWoodKite

    If the incentive to buy these notes is not there…

  • Larry Doyle

    Teak….the sales of Treasury debt through the Wall Street primary dealers will not discontinue. However, please be aware that there used to be 42 primary dealers. Given mergers and firms going out of biz, there are now only 16 primary dealers. These firms have greater opportunities but invariably have to take greater risk. The cost of that greater risk is a situation like yesterday, where the firms back off their bids.

    This Wall Street syndication process has been used for a LONG time.

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