Curve Watchers Anonymous is investigating the yield curve in the wake of reported “suspicious” bids for treasuries at the latest auction.

US Treasury Yield Curve Since 2003

click on chart for sharper image


  • $IRX: 3-Month Discount Rate
  • $FVX: 5-Year Treasury Note
  • $TNX: 10-Year Treasury Note
  • $TYX: 30-Year Bond

Chart above shows closing yield for the month except the front month is current.

Treasuries Approach Record Low After Note Auction

Bloomberg reports Treasuries Approach Record Low After Note Auction

Treasury 10-year note yields approached all-time lows after the U.S. sold $21 billion of the securities at a record rate and minutes from the Federal Reserve’s last meeting showed some members favor more stimulus.

The auction attracted record high demand from a group of investors that include pension funds and insurance companies. The notes drew a yield of 1.459 percent, compared with a forecast of 1.518 percent in a Bloomberg News survey of seven of the Fed’s 21 primary dealers. The previous record low auction yield of 1.622 percent was set last month.

Demand ‘Suspicion’

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.61, the highest since April 2010, compared with 3.06 percent in June and an average of 3.07 for the past 10 sales.

Direct bidders were awarded 45.4 percent of the auction, the most for any offering of U.S. government coupon securities on record. The $9.53 billion purchased was $5.16 billion more than at the previous offering on June 13. The previous record for direct demand at a 10-year note sale was 31.7 percent at the August 2011 auction.

“We don’t know and we won’t know” the source of that demand, said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “Given the sheer size, it’s unlikely a dozen people all decided to come in and it just is coincidental. So the shadow of suspicion is cast on a player or two.”

Since the start of 2012, direct bidders have won an average 21.1 percent of the debt sold at Treasury 10-year auctions. The next highest direct demand has come at 30-year bond sales, with an average award to direct bidders of 14.9 percent.

Indirect bidders, an investor class that includes foreign central banks, purchased 40.6 percent of the securities at today’s sale, compared with an average of 42.2 percent for the past 10 offerings of 10-year notes.

Suspicion Explained

For starters, the US is in a recession (see Case for US and Global Recession Right Here, Right Now; Recognizing the Limits of Madness; Permabears?), so demand for treasuries should rise.

However, that’s likely not the totality of the explanation. Foreign demand from China certainly plays a part.

Wait you say, shouldn’t foreign demand be indirect bidding? In the case of China, the answer is no.

Reuters reported on May 21, 2012 U.S. lets China bypass Wall Street for Treasury orders

China can now bypass Wall Street when buying U.S. government debt and go straight to the U.S. Treasury, in what is the Treasury’s first-ever direct relationship with a foreign government, according to documents viewed by Reuters.

The relationship means the People’s Bank of China buys U.S. debt using a different method than any other central bank in the world.

The documents viewed by Reuters show the U.S. Treasury Department has given the People’s Bank of China a direct computer link to its auction system, which the Chinese first used to buy two-year notes in late June 2011.

China can now participate in auctions without placing bids through primary dealers. If it wants to sell, however, it still has to go through the market.

The change was not announced publicly or in any message to primary dealers.

“Direct bidding is open to a wide range of investors, but as a matter of general policy we do not comment on individual bidders,” said Matt Anderson, a Treasury Department spokesman.

While there is been no prohibition on foreign government entities bidding directly, the Treasury’s accommodation of China is unique.

China Trade Surplus Hits 3-Year High

Yesterday I wrote China Import Growth Plunges, Trade Surplus Hits 3-Year High; Will US Response Be Protectionism? Is China Headed For a Deflationary Shock?

In light of all of the above, I have a few questions:

  • What is China going to do with a record trade surplus? The answer is buy more US treasuries.
  • What are pension plans and corporations going to do if the US is headed into recession?  The answer is buy more US treasuries.
  • What are those concerned about global growth and the situation in Europe (including capital flight) going to do? The answer is buy more US treasuries.

I fail to see precisely what is so “suspicious” about these non-revelations.

Capital Flight in Spain

Check out the Capital Flight in Spain as posted on FT Alphaville.

Things Can Get Disorderly

FT Alphaville reports … 

The result is not very pretty. Since the middle of last year, this has been a one-way show, with capital leaving Spain apace. Capital inflows have been almost non-existent. Indeed, Yiagos Alexopoulos at Credit Suisse reckons outlflows are currently running at an annualised rate of 50 per cent of GDP.

The analyst notes that the clear trend of foreign investors yanking money from Spain has been joined by evidence of domestic investors moving assets abroad. If that accelerates from here, things could get disorderly.

Emphasis added.

Yes, indeed, things can and will get disorderly in my opinion.

Mike “Mish” Shedlock
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