Something Very Strange Is Happening With Treasuries

Feb. 24, 2010 7:40 AM ETTIP, SPIP, SHY128 Comments
Graham Summers profile picture
Graham Summers

There are times in life when one witnesses something so outside the scope of normal experience, that at first you don’t see it.

Captain Cook’s diaries tell us that upon first seeing his ships offshore in Australia, the aborigines expressed “neither surprise nor concern.” Cook notes that it was not until he and his men approached the shore in smaller, more familiar vessels that the villagers reacted, arming themselves as “the sight of men in small boats was comprehensible to them: it meant invasion.”

Well, I had a similar experience during yesterday’s bond auction. Before going into the details, we need to fully explain how a Treasury Auction works.

First the Treasury issues a press release saying just how much debt is being issued (sold) during a given auction. This release also says how much of the Treasuries currently owned by the Federal Reserve are coming due that day, the implication being that the Fed will likely use the funds from their maturing Treasuries to buy some of the new debt issuance.

When it comes time for the auction, investors can either bid non-competitively (meaning they’ll take whatever yield is available based on demand) or competitively (meaning they have a minimum yield requirement and won’t buy the debt if it yields less). Non-compete bids are accepted first. After them comes the competitive bids until the total debt issuance is complete.

So let’s say the Treasury is issuing $10 billion in ten-year notes. On the day of the auction, the lowest competitive bid states it won’t accept anything under a 3% yield. So, the Treasury starts filling non-competitive bids at 3%. Once all the non-competes are filled, the Treasury starts filling the competitive bids in the order of increasing yields (so those competitive orders requiring a 3% yield are filled before those requiring a 3.5% yield) until the total debt issuance is met.

This article was written by

Graham Summers profile picture
Graham Summers is Chief Market Strategist of Phoenix Capital Research, a global investment strategy firm located in Washington, DC. He is a Fuqua Business School MBA graduate, and has over a decade of experience in investment strategy, financial research, and private wealth management. An acclaimed communicator and strategist, Graham’s cutting edge business and research insights have been featured in several media outlets around the world including: CNN Money, Fox Business, Rolling Stone Magazine, Crain’s New York Business, the New York Post, MoneyTalk Radio, and The Huffington Post among many others.

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