Seeking Alpha

The Treasury auctioned \$10 billion Long Bonds and the result was a genuine debacle for the taxpayers. The issue (in the jargon of trading rooms) tailed 10 basis points. A tail is the number of basis points from where the issue was trading in the market moments prior to the auction to the level at which it actually cleared. The auction average was about 10 basis points cheaper than market levels.That is mucho dinero. One basis point on a Long Bond equals 5 ½ /32s. The nuns taught me quite well in grammar school and that means that 10 basis points equal 55/32s. Because I do not wish to work to hard I am going to proclaim the result 56/32s which is 1 ¾ points and an easier number to work with it. That means that for every million bonds auctioned the Treasury paid an extra \$17,500.

Ten billion bonds is ten thousand million which when multiplied by \$17,500 means the result cost the taxpayers \$175,000,000.

As an aside the Treasury auction process can force this type of result. The Treasury holds a Dutch auction in which every one who bids is awarded bonds at the highest yield. The issue was trading at about 4.20 percent.

Let me make the point by using some hyperbole. Suppose that at the yield of 4.20 percent the Treasury had \$9 billion in bids for the \$10 billion issue. Now suppose there are no bids between 4.20 percent and 4.30 percent. Then miraculously there are \$1billion of bids at the 4.31 level.

In that unusual case all of those who bid 4.20 are awarded bonds at the 4.31 percent level. Everyone owns the issue at the cheapest price. So in an environment of risk aversion it is possible that this type of result might become commonplace.