Treasury Auction

by Larry Levin

Today was the second day of three consecutive, and important, Treasury auctions. Yesterday the 2-YR Note was auctioned off and for the first time in a long time, it didn't go very well. Today was the 5-YR Note auction, which happened to be WORSE than yesterday's IOU sale. Tomorrow is the 7-YR Note auction and one has to wonder; will it also be a stinker? And if so, what are the implications?

Prior to these recent auctions, all Treasury sales had gone quite well. With the MASSIVE amounts of money needed (to be borrowed) to bail out homeowners, auto companies, and Wall Street, people wonder where the hell the money would come from. Could the US Treasury really auction off hundreds of billions of Bills, Notes, and Bonds every month without a hitch? Until this week it seemed so; as if there was an endless supply of funds to support the profligate spending of the US Congress.

Bailouts? No problem! Nationalize the auto sector? No problem! Cap and Tax Bill? No problem! Free nationalized medicine? No problem! It's no problem said the White House, Federal Reserve, and Treasury because they have one of those killer trees that grows money. Check that - they have a whole orchard of them! Moreover, so do their friends in China and Japan.

Well, maybe not...

On Tuesday supply finally caught up with demand as the $42 billion 2-year Note auction proved sloppy with the high yield of 1.080%, a full 2-1/2 basis points over the 1:00 ET bid. The bid-to-cover ratio was decent at 2.75 but below the prior two auctions. Yet indirect bidding, which is a name for foreign central bank demand, was well below average. The results caught the Treasury market by surprise which sparked a rise in yields.

Today's $39 billion 5-YR auction was much worse. The bid-to-cover ratio was HORRIBLE at just 1.92. Moreover, the high yield of 2.689% was 5-1/2 basis points above expectations. Indirect bidding, which again is a name for foreign central bank demand, was very weak at just 37% vs. 63% in the June auction, suggesting that dealers are stuck with the supply. Treasuries weakened immediately due to the results.

The Treasury auctions $28 billion of 7-year notes tomorrow. How bad will that be? No matter; according to Wall Street aint no biggie - the news was ignored twice now. But Wall Street didn't just ignore the poor funding news for the plethora of give-away plans - oh no - it also ignored the bad consumer confidence data, as well as the horrifyingly bad durable goods data. That's how powerful this trend is.

But don't get completely fooled, all trends come to an end. During the dot.com bubble we were told that "profits don't matter." How'd that work out again? During the housing bubble build we were told that "housing prices would never decline." How'd that work out again? And now with the new treasury bubble we're told "printing money recklessly won't matter." Hmm, I wonder this one's going to work out?


Previous Day's Trading Room Results:

Trade Date: 7/29/09

E-Mini S&P Trades*
(before fees and commissions):

1) VA buy @ 8:50am at 969.00 = -.25 (1 lot)

2) Algorithm positions (5)

3) "Reading the Tape" positions (17) ...combined Secret's, Algo, & "Reading the Tape" total...+9.50


Electronic (YM) Mini-Dow:

1) None today



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