Auction Results: Less Than Festive

July 29th, 2009 1:53 pm | by John Jansen |

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.

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  1. 14 Responses to “Auction Results: Less Than Festive”

  2. By Al on Jul 29, 2009 | Reply

    perhaps it’s just that old math stuff:

    from bloomberg

    “President Barack Obama will sell a net $1.9 trillion of debt in the current fiscal year that ends Sept. 30, Goldman said in its report late yesterday.”

    “The U.S. raised $1.02 trillion this year selling Treasury securities to help finance a recovery from the recession, government data show.”

    looks like they will have to issue $900 billion more in the next two months.

    when almost all countries issue lots of debt nowadays, one can only wonder who’s really buying UST.

    the monetizing charade keeps going, I guess.

  3. By George on Jul 29, 2009 | Reply

    good post John. The background information is most appreciated.

  4. By Arn on Jul 29, 2009 | Reply

    Believe we had 5bp tails 3/25/09 and 9/25/08 as well.

  5. By Glen Bob on Jul 29, 2009 | Reply

    I can’t understand why TBT is down today….

  6. By John Jansen on Jul 29, 2009 | Reply


    It performs inversely to the long end of the curve and the 10 year yield has declined modestly and the Long Bond itself is the best performer on the list today.

    The market has split personality today.

  7. By Stuart on Jul 29, 2009 | Reply

    One wonders what the indirect bid would’ve been if they had not concocted the calc… Hmmm.. We are going to drown in treasuries..

  8. By Joseph on Jul 29, 2009 | Reply

    How many people here remember before (Bush I) the treasury used a single price auction? John put out the possibility that the last billion drove up the yield. This is still much better than the Salomon shenanigans that went on before single price auctions. BTW, treasury posts the median and low bid in the announcement.

    Re: who’s buying UST, some think the other central banks are printing money to buy these. I disagree. The increase in treasuries has been almost completely offset by a decrease in GSEs, the previous central bank favorite.

  9. By John Jansen on Jul 30, 2009 | Reply

    you misinterperted ( or i was very unclear) regarding the last billion dollars at an auction. That had nothing to do with anything that transpired today. I was trying to explain the manner in which the Treasury determines the auction yield.

    I was trying to teach and so the example was very hypothetical .

    i apologize for any confusion

  10. By Robert in Perth, Australia on Jul 30, 2009 | Reply


    Many thanks for the illustrative example on how tails operate and and your masterful insights generally.

    You have a massive fan in Australia…

    Best Regards,


  11. By Bill on Jul 30, 2009 | Reply

    Thanks for the recent “schooling” on the tail and market operations. Anything you say in this manner is a big help to us “newbies”.


  12. By Chicken on Aug 2, 2009 | Reply

    “Believe we had 5bp tails 3/25/09 and 9/25/08 as well.”

    Perhaps, but I’m unable to correlate this with market activity. Maybe I’m not looking closely enough, any ideas?

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