Ten Year Auction Result

June 10th, 2009 1:32 pm | by John Jansen |

Tim Geithner invited a host of folks to 10 year note auction party and very few of the guests showed up.

The auction of $ 19 billion 10 year notes received a less than enthusiastic response from investors. I think we can say that investors responded with a rousing Bronx cheer to the offering.

At the time of the auction the issue was trading at 3.955 percent in the brokers market. The market clearing price was 3.99 which represents a tail of 3.5 basis points.

The market has collapsed since the release of the results. As best I can tell the issue has not breached the 4 percent level (yet).

The yield curve is steepening quite a bit in response.

The 2year/10 year spread is now 262 basis . It traded briefly at 263 basis points which is a 50 percent retracement of the move from 278 (pre labor) and the 248  open yesterday morning.

The 10 year/30 year spread is 82 basis points and traded as narrow as 75 basis points. The street will spend the next 24 hours shooting the taxpayer in the big toe as it sets up for the bond auction tomorrow.

In the aftermath of the auction the issue traded back to a 4.82 percent yield. One could make a case that we are within spitting distance of a 5 percent bond.

How do you say short circuit the recovery with higher interest rates? Or maybe it is the Bernanke conundrum.

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  1. 25 Responses to “Ten Year Auction Result”

  2. By esb on Jun 10, 2009 | Reply

    BB’s problem it that he is attempting to control all markets simultaneously from his high-back padded leather chair.
    As Seven of Nine once remarked (or often remarked) “He will fail.”

    I suspect that the PBoC (People’s Bank of China) has finally had its fill of the twin egomaniacs (BB and Geithner).

    As Seven of Nine once remarked (or often remarked) “He will fail.”

  3. By esb on Jun 10, 2009 | Reply

    BB’s problem it that he is attempting to control all markets simultaneously from his high-back padded leather chair.
    As Seven of Nine once remarked (or often remarked) “He will fail.”

    I suspect that the PBoC (People’s Bank of China) has finally had its fill of the twin egomaniacs (BB and Geithner).

    If so, it is “game over” time.

  4. By Fred on Jun 10, 2009 | Reply

    John , both bid to cover ( 2.62 as compared with prior month’s bid to cover of 2.47 ) and indirect bid ( 34.2 as compared with prior month’s 31.9 – and better than average of past ten month of 25.8 ) , probably not as bad as feared though.

  5. By Bman on Jun 10, 2009 | Reply

    Not “game over time” yet. The Chinese have always been very price sensitive. My guess is they are seeing a bit more value now.

  6. By Brian on Jun 10, 2009 | Reply

    Only a matter of time before we see the 4 handle on 10’s… speaking of spitting distance to 5% on 30’s, right before 1:00, I got up from my desk and sat back down 2 minutes later and my terminal was reading 5.04 on 30’s! I almost fell out of my chair…must have been a bad data feed, but nonetheless, its almost there! What a debacle.

  7. By Steve on Jun 10, 2009 | Reply

    I don’t know how to translate treasury futures prices to interest rates, but I know that prices have continued to trade lower in the aftermath following the auction about an hour ago. We are now seeing the lowest treasury prices (higher yields) this year. Here is Bloomberg’s follow-up:


    Even their reporting may be “old news” however, because prices have continued even lower since their report was issued 25 minutes ago. I supposed that would suggest that rates may have breached 4%, at least momentarily?

  8. By Chicken on Jun 10, 2009 | Reply

    Fire up little Miss Heidelberg East and West.

  9. By John Jansen on Jun 10, 2009 | Reply


    I hate the bid to cover stat. The ratio is favorable but where were the bids. They were all back bids,away from the market. Suppose the bid to cover was 5 and the auction tails to 4.10. I am being ridiculous to make a point. I guess the Treasury would be happier if the bid to cover was 1 and the stop was 3.95.

  10. By Bman on Jun 10, 2009 | Reply

    A beautiful debacle. 10’s are about to go Atlantis – with 3’s – along with 2’s, 5’s, 7’s and all their friends before that. I will pull the net back in through 5% 10-yr in early 2010.

  11. By CR on Jun 10, 2009 | Reply

    10 yr notes have cheepened slightly in repo. They are in to -2 3/8 form -3.0%

  12. By Fred on Jun 10, 2009 | Reply

    John , as you noted , the bid was 3.99 with a tail of 3.5 bps , as compared with 3.955 trading price in the brokers market. Frankly , I thought this auction would have been worse from the standpoint of the indirect bid – clear trend has been for the short end of the curve to get the maximum attention from buyers. Does anyone really think 3.99 addresses the risk of these ten year bonds ?

  13. By Bman on Jun 10, 2009 | Reply

    No – but from a RV view, the first time back toward 4% in quite some time looks better. Some set shorts going in and like to cover via the auction as well.

  14. By CR on Jun 10, 2009 | Reply

    The low print for the day so far for 10yrs and 30yrs are (10-92.28=4.0 and 30-90.27=4.83). 30yr has not gone above 5%


  15. By zjin on Jun 10, 2009 | Reply

    How much of 30 bonds will be auctioned tomorrow?

  16. By gab on Jun 10, 2009 | Reply

    11 bananas. And 10’s are rallying out of the auction to 3.93. Probably not much more in front of 30’s tomorrow, but not bad action.

  17. By Bman on Jun 10, 2009 | Reply


  18. By troy on Jun 10, 2009 | Reply

    im covering

  19. By Gary on Jun 10, 2009 | Reply

    Long term inflation has averaged about 3.5%. Effective federal tax rate is 25%, so just to break even over the long haul, 10y notes have to yield 0.035/(1-0.25) = 4.67%

    This assumes that inflation does not go above average- after years of being being below trend, after the last two years of Fed helicopter dumping, and even though every billionaire investor from Warren Buffet to Julian Robertson to Jim Rogers to John Paulson have said inflation is going way up

    The above also assumes that effective tax rates won’t go up — even though everyone in Washington is saying they will go up; even though somebody has to pay social security benefits since the “trust fund” is nothing but IOUs.

    There is no way the US can pay back its debts in real terms — higher inflation is inevitable

    If inflation and taxes simply revert to the mean (and don’t go higher as everyone expects) — 10yr yields need to be 4.67% just to have a ZERO after tax real yield.

    Its absurd to say there is any value in Treasuries here, or even 100bp cheaper

  20. By Bman on Jun 10, 2009 | Reply

    I’ll cover when they pull his cold dead hands off the printing press.

  21. By Fred on Jun 10, 2009 | Reply

    Gary , you eloquently addressed my question regarding risk from my prior post !

  22. By Gary on Jun 10, 2009 | Reply

    Fred — while long term, the risk/reward ratio is less than abysmal, there are trading (not investment) reasons someone might buy:

    (1) many players are betting other people’s money. Primary dealers borrow from taxpayers (via the Fed) at 0% and then lend it back to the same taxpayers at 4%. Even a bank CEO can make money doing this
    (2) Fear and panic #1 … CMBS. Thousands of laid off people need less office space, and pay less rent on over-levered CMBS structures
    (3) Fear and panic #2 … credit card defaults
    (4) Fear and panic #3 … European banks failing (like WestLB almost did last weekend?)
    (5) Fear and panic #4 … the next wave of ARM resets this September / October. If you refi with negative equity, someone takes a loss (bank or taxpayers/Fed). The variable rate on many mtges is 1y CMT + spread, but is subject to a max and a minimum (no points if you guess whether the minimum is higher than the teaser rate).

    Number 1 is a slight variation on that age old question, “Where are all the customer’s yachts?”

    Numbers 2-5 might cause a flight to perceived safety — kind of like cattle fleeing from the ranch dog into the holding pen of the slaughter house. Long term you are hamburger meat, but short term you got away from that barking dog

    In the meantime, rest assured that a man that managed to screw up a monopoly in the phone business (which he supposedly knew about) is now going to be running GM — which he admits he knows nothing about. This phone man, with a lot of second guessing by Congress, is going to watch over the taxpayer’s investment in a car company that somehow lost a 65% global market share over the last 40 years when it was being run by car guys.

    Its only a matter of time before we are all alcoholics — so I think a really safe investment would be a beer making kit

  23. By Fred on Jun 10, 2009 | Reply

    Gary , can’t disagree with point one – when you’re playing with OPM and risk is off the table , why not roll the dice ? My focus isn’t really on the PDs , they have to buy bills , notes and bond on offer from the government ( one does wonder when they reach the tipping point where quantity offered by the government will exceed their ability to soak these up indefinitely. ) Points 2-5 , if you are an indirect bidder and have started shortening duration of US bonds , why would you now take on ten year bonds yielding 3.99 percent ? Why not buy some of the half a trillion or so of Bank FDIC bonds , even GMAC bonds backed by the government ? Or buy federally backed GSE debt with its higher yield ? If “panic ” like last fall really raises its head , why not buy very short term paper – just to have a place to park your money until the storm passes , without long term duration risks ? Considering the serious headwinds and real substantial risks for the economy , massive budge deficits over the next few fiscal years and implications that rising yield have on the ability of the US to service its debt – while fulfilling the balance of services / obligations of the federal government ( as our debt swells over the next three years ) , one wonders if our ability to service this debt (without effectively defaulting on our unfunded obligations at the federal level ) , can occur for three years – let alone ten years. But I understand where you’re coming from…..

  24. By Gary on Jun 10, 2009 | Reply

    Fred — I agree with you that the duration risk tilts the risk/reward against a trader.

    Short term Trsy buyers are gambling on sustained liquidity / ability to get out of their bet before the long term inevitable happens. I am just saying that there is a never ending supply of people who think they are smarter than the masses and they will get out just in time (right before they win the lottery I have heard).

    A lot of these people are betting that Bernanke will essentially monetize the debt, even if he calls it something else. This is a variation on the old joke, “we lose money on each sale, but we plan to make it up in volume”. In aggregate, its a guaranteed loss, but some individual traders may get lucky even if the majority lose more.

    As for paying the debt off… lots of people claim the first Chrysler bailout was a “success”. But if you are the government, you can’t just focus on return of principal. Propping up a failed company for the last 2-3 decades means that same capital did not get re-deployed in a faster growing industry… in other words, propping up a failed car company saves a bunch of jobs (for a while), but at the cost of a much slower growing tax base.

    GM and Chrysler have billions in tax loss carry forward “assets” — meaning any profits GM happens to make will be offset. With a high cost structure (low profits) — it will be a long time before these entities pay any taxes at all. Uncle Sam will never get the same tax revenue that it would have from a non-zombie company.

    With the non tax paying government (Fed, state and local) representing 30% of GDP; tax free universities and hospitals making another 15%; state turnpike and city transportation authorities another 10%; and zombie companies like auto and banks making another huge piece of GDP — there is a small and shrinking percentage still paying any taxes to support an exploding debt. And the baby boomers are about to retire / pay less taxes and start collecting entitlement benefits.

    An entity with a massive spending deficit today, declining revenue and expanding costs — is not risk free. The printing presses will be running full speed

  25. By Gary on Jun 10, 2009 | Reply

    I almost forgot — if you are a trader at a primary dealer (trading other people’s money), you don’t have duration risk on the 10y. You are borrowing at 0% (unless Bernanke raises, which is unlikely) and you are lending at 4% for ONE YEAR (or less), not ten.

    Yes, the note might say ten years maturity / 7 years duration on it, but this ignores the “trader’s call”.

    Heads, the trade works and the trader gets a million dollar paycheck.

    Tails, the trade loses and the trader switches jobs — leaving the bank with the loss / duration risk.

    A few banks are starting to implement clawback provisions and/or paying bonuses on a deferred basis — but that only limits trader comp, it doesn’t transfer losses away from the bank.

  26. By fredw on Jun 10, 2009 | Reply

    Gary , response to your post 24 – traders are rolling the dice – one day it’s a steepener trade , next it’s a flattener trade…. good luck with those moves. Indirect bidders will demand a rich price Thursday = will be interesting to see how high over 5 percent the bid will be 1 IMHO , one can’t compare the prior Chyrlser bailout wi this one. This time secured creditirs were cramdowned , one quarter of their dealers were summarily executed and they’re down to three brands.. GM will eventually be GMC / Chevy and either Caddy or Buick – my bet would be Caddy stay and Buick is sold to Chinese interests tor aise money. the tax carry forwards ( unless they extend that to ten years ) will expire worthless – no profits to offset at either company over the next 5 years …. what’s left of our non – command economy is under attack ( check recent threats toward google , intel , microsoft who facing antitrust attack / falling domestic tax revenues prompting attempts to tax foreign revenues – what happnes when these companies move their operations and jobs overseas ? ) QE has failed so far not that Ben won’t up the ante to a trillion or so , with the same results….BTW , did you see where the 8,000 buck tac credit to buy a home may be increased to 15,000 ( clusterstock ) by the Dems ! When that fails to prop up home prices , will taxpayers be asked to subsidize 25 thousand , 50 thousand buck credits ?

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