Monday, June 29, 2009

Possible Overstatement of Indirect Bidders In Treasury Auctions

Caution about the numbers for Indirect Bidders in Treasury Auctions:

The Treasury Department apparently made a change in early June in the way how they compute indirect bids. No one seems to have a definite answer as to what changed, but Indirect Bidder percentage in Treasury Auctions in June has been significantly higher in most cases, prompting the speculation by the traders of manipulation or massaging of the numbers so that the market sees high indirect bids (considered to be the proxy for foreign interest in Treasuries).

Here's an article from Reuters regarding the issue:

US Treasury auction changes may overstate indirect bid (6/24/09 Reuters)


SOMA System Open Market Account at the Federal Reserve New York Bank
Primary Dealer A bank or securities broker-dealer that may trade directly with the Federal Reserve System. Primary Dealers are required to bid at Treasury auctions. Current list of Primary Dealers is available at New york Fed.
Indirect Bidder Supposed to be the foreign investors, both foreign central banks and foreign private investors
Bid to Cover ratio The number of bids received divided by the number of bids accepted. The higher the ratio, the higher the demand.
Reopening The U.S. Treasury issues additional amounts of a previously issued security. The reopened security has the same maturity date and coupon interest rate as the original security, but with a different issue date and usually a different purchase price.
Cash Management Bill (CMB) A short-term security sold by the U.S. Department of the Treasury. The maturity on a CMB can range from a few days to six months. The money raised through these issues is used by the Treasury to meet any temporary shortfalls. CMBs tend to pay higher yields than bills with fixed maturities, but their shorter maturities lead to lower overall interest expense.
Supplementary Financing Program (SFP) A program initiated by the U.S. Treasury Department at the request of the Federal Reserve in September 17, 2008. The cash raised from the auction will be used in the various Federal Reserve initiatives to support the financial markets and manage its balance sheet.

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