Thirty Year Bond Auction: Not a Good Result for Hank Paulson
November 13th, 2008 3:07 pm | by John Jansen |The Treasury auctioned $10 billion Long Bonds and the result was a genuine debacle for the taxpayers. The issue (in the jargon of trading rooms) tailed 10 basis points. A tail is the number of basis points from where the issue was trading in the market moments prior to the auction to the level at which it actually cleared. The auction average was about 10 basis points cheaper than market levels.That is mucho dinero. One basis point on a Long Bond equals 5 ½ /32s. The nuns taught me quite well in grammar school and that means that 10 basis points equal 55/32s. Because I do not wish to work to hard I am going to proclaim the result 56/32s which is 1 ¾ points and an easier number to work with it. That means that for every million bonds auctioned the Treasury paid an extra $17,500.
Ten billion bonds is ten thousand million which when multiplied by $17,500 means the result cost the taxpayers $175,000,000.
As an aside the Treasury auction process can force this type of result. The Treasury holds a Dutch auction in which every one who bids is awarded bonds at the highest yield. The issue was trading at about 4.20 percent.
Let me make the point by using some hyperbole. Suppose that at the yield of 4.20 percent the Treasury had $9billion in bids for the $10billion issue. Now suppose there are no bids between 4.20percent and 4.30 percent. Then miraculously there are $1billion of bids at the 4.31 level.
In that unusual case all of those who bid 4.20 are awarded bonds at the 4.31 percent level. Every one owns the issue at the cheapest price.So in an environment of risk aversion it is possible that this type of result might become common place.
13 Responses to “Thirty Year Bond Auction: Not a Good Result for Hank Paulson”
By UrbanDigs on Nov 13, 2008 | Reply
John,
Do you attribute this at all to the bond players knowledge that ONLY the short end can be controlled by the fed and that there is diminishing interest at the long end?
Part of endgame to this crisis and all of the issuance upcoming to fund actions taken, is a likely surge in long end yields. Isn’t this the first proof of this?
Thanks
By UrbanDigs on Nov 13, 2008 | Reply
In addition, how do YOU view the actions taken by China to stimulate their own economy. Lets be real here, China likely has more stimulus to come as they are on a path to a hard landing. They cut back in agency purchases past few months and continued with treasury purchases.
If they simply slow down or stop purchasing treasuries, or worse, sell off some holdings as dollar strenghtens due to deflationary forces and unwind of carry trades and long euro/pound/short dollar trades, isnt it more of an incentive for them to take some off table, especially if US consumption slows hurting their exporting economy?
By Joe on Nov 13, 2008 | Reply
Urbandigs,
I too will be curious to read John’s answer. I suspect it is quite simple: supply and demand. There has been a huge recent issuance, huge end of month last month, huge middle of month this week, plus the T-bills. The primary dealers are simply getting tapped out.
I have to mention John’s comment about “Dutch auctions.” They may sound like a bad deal for the Treasury, but remember what Treasury auctions were like before that, in the ’80’s? I was still in college, and they were not nearly as honest as today’s auction system.
The $175,000,000 mentioned is the price Paulson pays for trying to sell so much.
By joe on Nov 13, 2008 | Reply
Urbandigs and Joe, see Brad Setser’s post here:
http://blogs.cfr.org/setser/2008/11/12/china%e2%80%99s-fiscal-stimulus-doesn%e2%80%99t-necessarily-mean-that-it-will-stop-buying-treasuries/
By UrbanDigs on Nov 13, 2008 | Reply
Im in no position to challenge Brad, but it cant help that china is stimulating their economy, more to come, dollar is rallying making t-holdings more attractive to sell / less attractive to buy, US consumption is slowing big time and exports from China are likely to come down, and the already hold a ton of our treasuries.
Even if they slow down or stop purchasing, that will have an effect
By tsunami on Nov 13, 2008 | Reply
19% foreign buyers:down from 37%&44%, time was 55%. Plain & simple the dealers are STUCK with the paper.
Some must have sold it off when they received the auction results. How convenient for them that stocks rallied.
Some thing is UP the US contract (30yr) is out of sink with cash about 4 point or 120/32nds…
Looks like their stuck in other places tooooo!
My guess, T+3 or 11/15 when settlement arrives these Dealers/ Banks will be selling the kitchen sink to get flat..Or begging Paulson for another “bankster bailout”…
By David on Nov 14, 2008 | Reply
The Fed can print money to buy long bonds right? My understanding is that the Fed can completely control the whole treasury yield curve if they want since they have unlimited money. Of course there are consequences. But the consequences of printing money are not that yields spike as some people say. They can choose to control that. The consequence is that it will weaken the dollar and cause inflation in the US. But if the problem is deflation will falling home prices it seems that those consequences are not so bad. You could even say desirable. I am sure it is not quite so simple. What would be the other consequences of this.
By UrbanDigs on Nov 14, 2008 | Reply
David,
Im not so sure about that. John can yo chime in on David’s question?
By Gregor on Nov 14, 2008 | Reply
Treasury supply is now the last lever by which a years’ worth of reflationary efforts will finally trigger. Yesterday’s auction clearly sent a signal to gold, oil, and other risk assets like equities and of course currencies. The ultimate goal of all reflationary efforts, whether simple rates cuts in a normal recession–or in emergency economic conditions–is to drive all the capital that has herded itself into safety assets back out, into risk. I do, in fact, think the parabolic growth in Treasury supply will finally do the trick here. And yesterday was the signal.
http://gregor.us/debt/when-bonds-and-commodities-collide/
By cyclingscholar on Nov 14, 2008 | Reply
Hmmmm..maybe the Feds can foce me out of their government bonds, but the idea that they can force me into common stocks (and I hope thats not their idea) by doing so is wrong. If you push me out of my parking spot in downtown Manhattan do I go park in Compton?
I think not. I’d get rid of my car.
cyclingscholar
By Katelyn on Nov 18, 2009 | Reply
He who knows others is learned; he who knows himself is wise.