Tim Geithner threw a party today and he proved to be the most unpopular boy on the block as the response to his invitation was less than enthusiastic.
The 5 year note produced a yield of 2.689 percent. I often write here of the “tail’. The “tail’ in an auction is the difference between where the issue was trading in the market at the moment the bids are submitted (100PM NY time) and the level which fills the Treasury’s coffers with the offered $ 39 billion.
I am going to digress here. The Treasury holds a single price auction and bonds trade on a yield basis (WI trading,with WI bond market parlance for when issued) prior to the auction. The WI 5 year note was trading at about 2.64 percent.
The way the Treasury determines the yield can be observed by a hypothetical circumstance which I shall offer.
There were $ 39 billion 5 year notes for sale. Suppose that the Treasury received $ 38 billion of bids at the 2.64 percent level at which they were changing hands in the marketplace. They still require an additional billion to meet the $ 39 billion objective.
Now for the purposes of this discussion let us assume that inexplicably there are no bids at any level between 2.64 and 2.689 percent. Magically, there are $ 1billon of bids at the 2.689 level and Tim Geithner can stop hyperventilating.
The process is such that the yield for everyone who bid is the yield level which clears the market. There is no “bidders curse” in which the folks who bid 2.64 would feel pretty stupid about misjudging the market so badly. Anyway, the important point is that this market clearing level is the level at which all who bid will own securities.
Back to the tail. The tail is an indicator of relative interest in the auctions and the 5 basis point tail on the 5 year note today was rather large. Unfortunately, I have no facility here to check history but I just spoke with a fellow who trades the belly and he suggests that it has been more than year since one has tailed that much.
And it is also troubling that it happened in concert with the sloppy 2 year note auction yesterday. Several participants have reported that the 2 basis point tail yesterday was the first tail on the 2 year note since December.
And if the Treasury had concocted a plan to obfuscate the meaning of the indirect bidding category to make it appear that there is more central bank interest than there really is, then that enterprise has been an abject failure as the indirect bidding interest has been parsimonious yesterday as well as today.
Tomorrow the Treasury will sell $ 28 billion 7 year notes into a thin market. It appears that the market is undergoing some recovery as I write but with the poor results of today and yesterday it is difficult to see anyone taking a brave stand tomorrow with out an appropriate concession.