Is Doctor Heimlich in the Room?

October 8th, 2008 1:16 pm | by John Jansen |

The Treasury startled the markets with an announcement of new supply in the so called belly of the Treasury curve. The specter of supply which had been widely discussed just became cold hard reality.The Treasury is reopening four issues which had been previously issued as 10 year notes and which have since rolled down the curve. (If there is a potential blogger in the room, some variant of roll down the curve might be a catchy name.) They have reopened each of these issues for a cool crisp $10 billion: 4. 125 05/15/15; 4.25 08/15/15; 4 02/15/15; and the 3.5 02/15/18.

The May 2015 and the August 2015 notes are being sold today and the other two will be sold in auctions tomorrow.

Separately, the Treasury had previously announced a $6 billion reopening of the 10 year TIPS bond with an auction today.

That is $46 billion dollars of securities, most of which were not expected , crammed into a rather compact period of time. By the time this is over the belly of the Treasury curve will be in need of a financial Heimlich maneuver to dislodge the supply.

The auction of the May 2015 issue was an amazing occurrence. The Treasury gave the dealer community about an hour to underwrite $10 billion of supply. That was a big mistake. I always kid that in the underwriting process it is the job of the dealer community to shoot the taxpayer in the big toe. In this instance they amputated a leg instead.

Let me explain. There once was an active and deep market for off the run Treasury paper. An off the run is an issue offered by the Treasury at another time which has now rolled down the yield curve. Several of these issues mature in about 6 years. They were originally sold as 10 year notes. They have lost on the run status and qualify as off the run.

So the first issue in the queue was the May 2015 issue. Unfortunately, I do not have precise yield levels but will try and back into the answer. The auction average was 3.31 percent. I am told by participants that the 3.31 percent yield was 40 basis points cheap to the level which prevailed in the market prior to the auction. The point is that in order to rustle up the $10 billion of bids to clear the $10 billion auction the Treasury had to reach 40 basis points from market levels.

In bond market jargon that 40 basis points is known as a “tail” or the number of basis points from where the issue was to the level at which it stopped. Most auctions come “on the screws” which is more jargon for the notion that they come essentially where they are trading at auction times. A typical “sloppy” auction might “tail” 2 basis points. There are 5 basis point tails and I can recall 10 basis points and even 15 basis point tails. They are rare. Extremely. In all my years I can not recall a 40 basis point tail and shall proclaim this the record holder.

Now to place that in dollars and sense terms for the taxpayers of the USA I offer this. On that bond every basis point is worth a little more than $600 per million bonds. Multiply by 40 basis points and you get $24,000 per million. The auction size of $10 billion equates to 10000 million. Multiply by 24,000 and the product is $240,000,000.

In a market to market sense it cost the taxpayers that enormous sum to underwrite the auction today.

There are three more of these coming in rapid succession. Each will be priced at the new expensive for the taxpayer levels.

I would say that the Treasury paid too much money to rectify the delivery problems in the street.

I have written too much so this will be brief.

As I mentioned earlier in this lengthy screed, the Treasury is selling $6billion reopened 10 year TIPS today. I mentioned yesterday that the breakeven spread had moved to 125 basis points. (One reader took umbrage at that analysis with some valid points but so be it.) That spread had collapsed prior to the auction to about 100 basis points which means that taxpayers are supplementing bonus pools on that issue also.

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  1. 27 Responses to “Is Doctor Heimlich in the Room?”

  2. By alex on Oct 8, 2008 | Reply

    This is a very interesting post . Thanks for sharing the knowledge. It’s clear that our leadership is acting under duress. I hope their efforts yield some fruit soon or at least, eventually.

  3. By Jtte on Oct 8, 2008 | Reply

    This is very insightful. thank you for explaining it so well!!!

  4. By BusinessTime on Oct 8, 2008 | Reply

    You’re indispensable, John!

  5. By mxq on Oct 8, 2008 | Reply

    massive thanks for that pointer!

  6. By rj on Oct 8, 2008 | Reply

    I don’t understand, are they taking this haircut because they’re desparate for money or because they’re desparate to get the treasuries out there.

  7. By alex on Oct 8, 2008 | Reply

    From Bloomberg;

    U.S. Treasury to Sell More Debt to Address Shortages (Update1)
    By Rebecca Christie

    Oct. 8 (Bloomberg) — The U.S. Treasury said it will sell more debt to meet demand for government securities and alleviate “protracted shortages,” said Karthik Ramanathan, the department’s head of debt management.

    The market disruptions are primarily affecting two-year notes through 30-year bonds, Ramanathan said in a statement released in Washington. The Treasury said it would sell $40 billion in reopenings of 10-year notes today and tomorrow, in four separate auctions of $10 billion each.

    The four securities have maturity dates of Feb. 15, 2015; May 15, 2015; Aug. 15, 2015; and Feb. 15, 2018.

    “To address upcoming borrowing needs and further enhance liquidity in the Treasury market, Treasury will reopen multiple securities which have created severe dislocations in the market, causing acute, protracted shortages,” he said.

    Treasury markets have been struggling with elevated numbers of transactions that don’t settle properly, called failed trades or fails, in part because U.S. government securities have been in such high demand.

    Ramanathan said the Treasury will monitor fails and encourage market participants to find ways to solve the problem.

    “Private-sector participants should take additional steps from a monitoring and supervisory perspective to ensure that settlement fails do not reach levels that impact financing markets,” he said.

  8. By Jeff on Oct 8, 2008 | Reply

    You’re doing a really great job with these posts. I can’t stand some of the other blogs out there, I’m not really sure what qualifies some of them to be making commentary. Great to see someone who actually knows what they are talking about. Keep it up!

  9. By troy on Oct 8, 2008 | Reply

    i remeber in late 79 during iran-contra we had 35 beep tail… on the long end, not the belly!!!

  10. By islonim on Oct 8, 2008 | Reply

    thanks. great post and great site!

    what does it have to do with the repo market?

  11. By Andy on Oct 8, 2008 | Reply

    Maybe they’re letting the TARP crew practice their overpaying skills…

  12. By John Jansen on Oct 8, 2008 | Reply

    i started at the Open Market Desk in December 1979. But dont recall that one.

  13. By Hit The Bid on Oct 8, 2008 | Reply

    I used to help trade the long end off the runs, but have since lost touch (left industry in 2000.)A move like this I would imagine will kill normal trading in that area…who know when a whale will come up and swallow you?

    a 40bps tail is unbelievable. I’d love to know why they had to effectively cram down the primary dealers in such a short period of time ( especially when there are so few left)

    Any one know what the current CTD on 10s is?

  14. By John Jansen on Oct 8, 2008 | Reply

    i will ask in my next go round about the CTD. I think it isone of the 2015s they reopened.

    Separately, hit the bid ties with fullcarry as the best name to frequent the blog.

  15. By Fullcarry on Oct 8, 2008 | Reply

    8/15s and 5/16s are equi-cheap right now. 8/15s was trading at 128 Gross basis before the announcement. The auction came in at 23. It is now trading around 37.

    Sorry for the inside Lingo.

  16. By John Jansen on Oct 8, 2008 | Reply


  17. By JPHouston on Oct 8, 2008 | Reply

    I wonder if the CP market was cement-like all day?

    Awesome blog.

  18. By coastiepilot on Oct 8, 2008 | Reply


    Am I correct in saying that in “normal times” that the OMO Triparty Repo’s assist the Primary Dealer’s in absorbing new Treasury supply (credits their accounts at the Clearing Bank); of which they are “required” to participate in the auctions?

    How much more of the new supply can the PD’s absorb without a POMO (monetization) or massive longer term REPO’s?

    How much longer can the Treasury keep this ponzi up (issuing new debt to pay maturing debt)?

    Can the lack of participation in the longer maturity Treasuries be as much about lack of confidence in the Treasury itself, as it is about the better CP returns?

    Thanks in advance, just trying to better my understanding of the situation, I’m not a trader.

  19. By Hit The Bid on Oct 8, 2008 | Reply

    I could see the Feds towel snapping the PDs that are squeezing some of those Off The Runs, but otherwise, why would they care? What else would they want them doing? reducing inventory and just flow trading?

  20. By gomad361 on Oct 8, 2008 | Reply

    On the May 2015 auction data from the Treas site I’m seeing a high yield of 3.31% with 15.1% of the $10 bil. at that level. The median yield was 2.899%, 41bps below the high (and where it was trading before the auction?). The auction was bad with a huge tail but not quite as bad as you say – unless I’m missing something.

  21. By John Jansen on Oct 8, 2008 | Reply


    All of your numbers appear correct. But there is one important factor that you are missing.

    If you bid 3.31 you won 15.1 percent og what you bid for.

    The people who bid 2.90 also own bonds at 3.31 percent.

    The Treasury awards the the bonds at the price which clears the market.

    So since they had to reach to 3.31 to find $10 billion bids,everyone who bid owns them at 3.31

    I dont have the treasury web page up but I believe that there were bidw as rich as 2.78 percent.

    Those folk own them at 3.31 also.

    In a Treasury auction the lowest winning bid establishes the award price.

    I hope that is clear.

  22. By jrackell on Oct 8, 2008 | Reply

    Dumb question – Sorry – but were these off the run treasuries originally sold as 10 year notes and later repurchased by the Treasury, and now being sold off the run; or were they from a batch of 10 years that couldn’t be sold at the original 10 year note auction and are now being sold 4 years later. Or something else?

  23. By John Jansen on Oct 8, 2008 | Reply

    something else…..these are brand new securities…..freshly minted.the ink has yet to dry on them and until today they have never seen the light of day.

    it is the treasury creating brand new debt.

  24. By MW on Oct 9, 2008 | Reply

    As a point of interest, there was a 36bp tail in a long-dated UK linker auction recently…will look for the details.

    CTD on Dec 10y future is the 5 1/8 of May 16.

  25. By ird on Oct 9, 2008 | Reply

    great post. happy to see the details explained in this manner.

  26. By gomad361 on Oct 9, 2008 | Reply

    Thanks John – very clear. So it looks like it was a bit of a gift to everyone on the street that wasn’t long that bit of the curve. Why do you think the Treasury choose to issue there? Was it because that issue or part of the curve was particularly special/rich?

  27. By Richard on Oct 11, 2008 | Reply

    I stumbled here to this post wondering if Repo Fails are going to cause a systemic risk event, you know a total economic breakdown.

    1) Do you believe they will?

    You remark “That is $46 billion dollars of securities, most of which were not expected, crammed into a rather compact period of time. By the time this is over the belly of the Treasury curve will be in need of a financial Heimlich maneuver to dislodge the supply.”

    2) I take this to mean someone gets stuck with the supply; if so, and is it painful? and to whom?

    3) I take your post here to mean that the taxpayers got hurt. If so what was the cost?

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