The U.S.: Land of the Free and Home of a Nearly Failed Treasury Auction of Its Own

Includes: DIA, QQQ, SPY
by: Graham Summers

While most of the investment world focuses on the various ”senior officials” (none of whom seem to have actual names or positions) commenting on whether Greece will or will not be bailed out / receive an emergency loan / be offered moral support, a far more significant debt story is emerging in the US.

On Wednesday, the US offered $16 billion worth of 30-year Treasuries (US debt that will mature in 30 years). Before we get into the details of how much of a disaster the auction was, we’re going to do a brief review of how US debt issuances work.

US Debt is issued by the US Treasury. You can bid as much as 30 days in advance of a debt auction. When the auction actually takes place, investors can buy directly (Direct Buyers) by buying Treasuries themselves OR they can buy indirectly (Indirect Buyers) by using a Primary Dealer, one of 18 Banks and Securities Brokers who do business directly with the US Federal Reserve Bank of New York and so HAVE to buy Treasuries at auctions to ensure liquidity.

Direct buyers buy “off the radar,” meaning you cannot track who the buyer is.

If an investor buys indirectly, he or she has to notify the Primary Dealer of his/her intentions in advance. This might sound a bit like showing your hand while playing poker, and it is. The only reason to go through a Primary Dealer (make an Indirect Purchase) is because you want to buy a sizable load of Treasuries (remember, Primary Dealers have a special relationship with the Fed and so can ensure you get the amount you require).

Historically, foreign governments (China, Japan, etc) have made up the majority of Treasury purchases. Because of this, the Indirect Buyer purchases are typically thought to represent just how much demand foreign governments have for US debt.

I realize this sounds complicated, so simply think of it this way:

1) Direct Buyers: folks who buy straight from the Treasury, typically comprising a minor stake in US debt purchases

2) Indirect Buyers: folks who buy LARGE chunks of US debt, typically Foreign Governments

3) Primary Dealers: banks that HAVE to buy US debt to ensure an auction doesn’t fail. You don’t want to see a lot of Primary Dealer purchases as this means that those who can CHOOSE to buy US debt DON’T want to.

On Wednesday, February 10, 2010, the US Treasury issued $16 billion in 30-year Treasuries. Here are the buyer data points:


Purchase Amount (%)

Primary Dealers


Direct Buyers

24% (A RECORD)

Indirect Buyers


First of all, we see Direct Buyers hit a RECORD percentage of purchases. This is extremely bizarre and somewhat disconcerting given that we have no way of knowing who these buyers are. For all we know, they could be the Federal Reserve itself or other US Government entities buying “off the radar.”

Indeed, on that note, we know that the US Federal Reserve accounted for 11% of the total purchases. Folks, you’re not dealing with a healthy debt auction when the Fed accounts for 10% of purchases.

However, far, FAR more worrisome is the pathetic Indirect Buyer takedown: 28%. Historically this number has been more around 40% (Tyler at ZeroHedge notes that the average Indirect purchase of the last four long-term Treasury auctions was 39.9%). To see such a MASSIVE drop off in Indirect Buyers (40% down to 28%) is a MAJOR warning sign that Foreign Governments are no longer willing to buy long-term US debt.

This auction was a very small step away from a failed auction. To see Primary Dealers buying so much (remember they HAVE to buy it) and Indirect Buyers so little, only confirms what I’ve been saying for months: that the US is entering a Debt Spiral; a situation in which it must issue more and more debt (while rolling over trillions of old debt) at the very time that fewer and fewer investors are willing to lend to the US for any lengthy period of time (more than ten years).

Folks, forget Greece, the US has its own debt problems. And they’re MAJOR. The fact that stocks RALLIED on this news tells you how disconnected stocks are from reality. The Debt Spiral has started and is now accelerating. It’s only a matter of time before it becomes a full-fledged crisis. And this one will make 2008 look like a cakewalk.