Three of the nine primary dealers that met with Treasury officials ahead of today’s announcement of the government’s quarterly financing plans said they’re concerned about the increase in so-called direct bids, according to people involved in the discussions. The Treasury will release details of discussions with its debt advisory group today, as well as how much in 3-, 10- and 30-year securities will be sold next week.
Direct bidders accounted for 10 percent or more of the total in 12 of 42 fixed-rate auctions since July, compared with only 6 times from 2004 to 2008, according to Treasury data. The Wall Street firms say the increase in bids sent directly to the Treasury by investors including banks, large money managers and hedge funds may raise borrowing costs for the Treasury and taxpayers if dealers bid less aggressively because of higher volatility at the sales.
Are the distortions from direct bidding in the Treasury auctions becoming too large to go unnoticed? The most recent 7-year auction results reveal this trend.
It's a mess in the bond market. Deficit spending and taxpayer bailouts have created massive supply. The Chinese, however, has cut back on their marginal purchases since the summer of 2009 - right at the time direct bidding begins to increase.
Direct bidding is great way to provide demand without creating ripples. That is, until it becomes obvious and the distortions too disruptive.
Source: Bond auction results
Source: Treasury bids drive speculation
Source: Tic analysis
Source: bloomberg.com
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