It seemed most suspicious that foreign central banks appeared to be frantically buying U.S. Treasuries at the most recent bond auctions despite backing off in the period just prior. However, in keeping with corrupt traditions, the truth of the matter is that the U.S. Treasury just changed the reporting rules to give a big boost to "supposed" central bank buying.
Of course, U.S. Treasury officials have claimed it was done to "increase transparency" (cough cough cough) and coincidentally these same Treasury do-gooders were unavailable for comment. Funny how know one seems to be available to take credit for these so called reporting improvements?
By Min Zeng
DOW JONES NEWSWIRES
June 24, 2009 15:56 ET (19:56 GMT)
NEW YORK (Dow Jones)–The recent sharp rise in demand for U.S. Treasury debt from buy-side investors, including foreign central banks, is partly the result from a recently implemented change in Treasury security auction rules.
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The so-called indirect bids, a term used to describe broad interest from buyers both domestic and international, have crept up in recent auctions since the revisions to the rules became effective on June 1.
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Under the old rules, many orders from investors executed through the primary dealer banks that trade directly with U.S. Federal Reserve were counted as bidding from dealers, not indirect bids. The new rules will help get more detail, and statistically show higher interest from foreign lenders, some of whom have questioned their U.S. debt holdings.
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Getting a better sense of investors’ appetite, especially overseas, is imperative to the U.S. government at this critical time when it needs to sell record amounts of debt in order to tackle surging budget deficits and fund massive stimulus programs to get the economy back on track.
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Some big creditors such as China, Russia and Brazil have expressed concern about the value of their dollar-denominated holdings because they are worried that swelling public debt and aggressive monetary policies from the Fed may generate inflation down the road and weaken the U.S. currency. That, in turn, may put their massive Treasury holdings at risk of sharp losses.
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The revised rule, published in the Treasury’s Bureau of the Public Debt’s Web site, eliminates a provision related to “guaranteed bid” arrangements that was intended for multiple-price auctions, a type of auction that was discarded at least a decade ago.
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Treasury officials didn’t respond to requests for comments.
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In a guaranteed bid, a foreign central bank or institutional investor gives a certain amount of money to a primary dealer, who is required to bid on U.S. government debt auctions. The dealer then bids aggressively on an auction to make sure its customers get a hold of the securities.
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“It appears that the intent of the rule change is for greater transparency and accuracy in terms of reporting who the actual end-buyers are,” said Chris Bury, co-head of rates trading and sales in New York at Jefferies & Co., a primary dealer.
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“As a result we expect to see a higher reported percentage of indirect bidders going forward.”
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This week alone, the U.S. Treasury is selling a record breaking $104 billion in notes, and demand from foreign investors is especially relevant, because they own more than half of Treasury securities outstanding.
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The sentiment seemed to have turned Tuesday, when the $40 billion two-year note garnered an indirect bid of 68.7%, sharply higher than 54.4% from the previous auction in May and the average of 36.4% for the last 11 auctions. The last time the indirect bid went above 60% was back in 2004.
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Wednesday’s $37 billion, five-year note auction also went surprisingly well, given it came shortly before the release of the Federal Open Market Committee statement. The indirect bid jumped to a record high of 62.8%, compared with 30.8% last month.
With the rule changes, the Treasury Department and the Fed can now have a better idea of the identity of end-buyers from the Treasury auctions.
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“Clearly what the government is trying to do is make sure there is transparency that people who are bidding on auctions are not hiding behind primary dealers,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, a primary dealer.
“They want to know the flows. That is the key for them,” said Edmonds.
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With the rule revisions, both the government and market participants in the Treasury market will now keep a close eye on the indirect bid numbers in coming auctions.
“If the indirect bid is lower, auctions may be poor,” said James Combias, head of U.S. Treasury trading at Mizuho Securities USA Inc. in New York, another primary dealer.
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Combias also said that some buy-side investors may be discouraged from putting on bids, given that they may want to keep their names under wraps in the auction. Some of them may choose to go for the direct bids, causing the indirect bid number to go down, he said.
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Still, many primary dealers note that the rule change is simply an accounting shift. The revision itself is unlikely to have any impact on trading in Treasury market.
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“It will be better gauge for bidders. But it is just clarification of rules. I don’t think there is much more to it than that,” said Thomas Roth, head of U.S. government bond trading in New York at Dresdner Kleinwort Securities LLC, also a primary dealer.
