Monday, February 15, 2010

The Canary in the US Debt Coal Mine

I would suspect that it is not a coincidence that this result came in the first auction after the new Obama budget came out, which predicted that we'll carry deficits way, way in excess of anything we've ever done far into the future. Watching an actual Western country default (Greece) with others circling the drain (Spain, Italy, Portugal, Ireland) could not have helped reassure those who think the US debt load makes it vulnerable. (How China ties into this is hard to say, given how uncertain their response will be to their own massive asset bubble).

"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."

more evidence:

"The bid-to-cover ratio, which measures demand, came in at 2.67. That's below 3.00 at the previous auction...

The yield on the 10-year Treasury note that matures in November 2019 rose to 3.69 percent from 3.65 percent late Tuesday. Its price fell 11/32 to 97 13/32. The yield on the 10-year note is a benchmark for interest rates on mortgages and other consumer loans....

The yield on the two-year note that matures in January 2012 rose to 0.89 percent from 0.84 percent. Its price fell 3/32 to 99 31/32.

The yield of the 30-year bond maturing in November 2039 rose to 4.64 percent from 4.58 percent. Its prices fell 27/32 to 95 23/32.

The yield on the three-month T-bill that matures May 13 rose to 0.10 percent from 0.09 percent. Its discount rate stood at 0.10 percent."

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