The Treasury startled the markets with an announcement of new supply in the so called belly of the Treasury curve. The specter of supply which had been widely discussed just became cold hard reality.The Treasury is reopening four issues which had been previously issued as 10 year notes and which have since rolled down the curve. (If there is a potential blogger in the room, some variant of roll down the curve might be a catchy name.) They have reopened each of these issues for a cool crisp $10 billion: 4. 125 05/15/15; 4.25 08/15/15; 4 02/15/15; and the 3.5 02/15/18.
The May 2015 and the August 2015 notes are being sold today and the other two will be sold in auctions tomorrow.
Separately, the Treasury had previously announced a $6 billion reopening of the 10 year TIPS bond with an auction today.
That is $46 billion dollars of securities, most of which were not expected , crammed into a rather compact period of time. By the time this is over the belly of the Treasury curve will be in need of a financial Heimlich maneuver to dislodge the supply.
The auction of the May 2015 issue was an amazing occurrence. The Treasury gave the dealer community about an hour to underwrite $10 billion of supply. That was a big mistake. I always kid that in the underwriting process it is the job of the dealer community to shoot the taxpayer in the big toe. In this instance they amputated a leg instead.
Let me explain. There once was an active and deep market for off the run Treasury paper. An off the run is an issue offered by the Treasury at another time which has now rolled down the yield curve. Several of these issues mature in about 6 years. They were originally sold as 10 year notes. They have lost on the run status and qualify as off the run.
So the first issue in the queue was the May 2015 issue. Unfortunately, I do not have precise yield levels but will try and back into the answer. The auction average was 3.31 percent. I am told by participants that the 3.31 percent yield was 40 basis points cheap to the level which prevailed in the market prior to the auction. The point is that in order to rustle up the $10 billion of bids to clear the $10 billion auction the Treasury had to reach 40 basis points from market levels.
In bond market jargon that 40 basis points is known as a “tail” or the number of basis points from where the issue was to the level at which it stopped. Most auctions come “on the screws” which is more jargon for the notion that they come essentially where they are trading at auction times. A typical “sloppy” auction might “tail” 2 basis points. There are 5 basis point tails and I can recall 10 basis points and even 15 basis point tails. They are rare. Extremely. In all my years I can not recall a 40 basis point tail and shall proclaim this the record holder.
Now to place that in dollars and sense terms for the taxpayers of the USA I offer this. On that bond every basis point is worth a little more than $600 per million bonds. Multiply by 40 basis points and you get $24,000 per million. The auction size of $10 billion equates to 10000 million. Multiply by 24,000 and the product is $240,000,000.
In a market to market sense it cost the taxpayers that enormous sum to underwrite the auction today.
There are three more of these coming in rapid succession. Each will be priced at the new expensive for the taxpayer levels.
I would say that the Treasury paid too much money to rectify the delivery problems in the street.
I have written too much so this will be brief.
As I mentioned earlier in this lengthy screed, the Treasury is selling $6billion reopened 10 year TIPS today. I mentioned yesterday that the breakeven spread had moved to 125 basis points. (One reader took umbrage at that analysis with some valid points but so be it.) That spread had collapsed prior to the auction to about 100 basis points which means that taxpayers are supplementing bonus pools on that issue also.