30-Year Bond Auction: Sorry, Paulson, Not a Good Result

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.

Comments

[OilyGasMiner:]

John, Paulson clearly has his own agenda that is NOT aligned with that of the American public. If ONLY he could be held accountable. I've never seen one layman have to much influence over world markets. He SHOULD be scrutinized to the full extent. Luckily for him, his term is almost over. I do feel sympathy for the next US Treasurer, that has to take over his mishap.

As Paulson said: “To adequately reform our system, we must make sure we fully understand the nature of the problem, which will not be possible until we are confident it is behind us”.

In translation: “We can’t figure out what caused the serious structural cracks to develop so fast in that huge wall over there so let’s throw as much sh_t against it as we can and hope some of it sticks and stops the wall from falling. Then let’s analyze the components of the sh_t that stuck and see if we have enough of that kind of sh_t left to fill the rest of the cracks and make the wall stable again. Only by determining the kind of sh_t we need by trial and error will we ever figure out why the wall cracked in the first place!” lol

Source: www.stockresearchporta.../

2008 Nov 13 03:51 PM