Saturday, September 16, 2006

U.S. Treasury Auction Fails - July 29, 2009

I have been watching the U.S. Treasury Bond/Note sales closely this week due to the sheer size of the offerings - $235 Billion. With all of the recent stimulus packages and bailouts - the question everyone is asking is – how much of our debt is the world willing to buy? Yesterday’s bond auction is the first indication that we’re in serious trouble.

‘Primary Dealers’ (Goldman Sachs, JPMorgan, etc.) of Treasury bonds/notes are required by the government to buy whatever is not sold. This hasn’t caused any heartburn for them in recent years because we’ve had ample demand for our bonds/notes – this is now changing. Primary dealers of yesterday’s auction were forced to buy a significant amount – which is why the auction effectively failed. Without primary dealer purchases, we would not have sold all of the bonds offered. It’s not hard to see why – our economy is unstable and our budget deficit of $1.8 trillion is flooding the market with our debt. Supply is outstripping demand. The U.S. government has been balance sheet insolvent for some time (liabilities exceeding assets) – our inability to sell bonds is the first step towards cash flow insolvency – bankruptcy and debt default. If you think things have been crazy over the past year – just wait until this gets out in the mainstream media. It doesn't help that the Treasury is selling another 28 billion in 7 year notes today and then quarterly refunding begins. Remember, just a few short months ago - our government was auctioning around $10-15 billion a week.

Many people who have kept an eye on Treasury auctions over the past year believe that it is entirely possible the Federal Reserve has been supporting Treasury Auctions directly (monetizing our debt). This is one reason they believe the Fed is opposed to an audit. I have attached a brief blog post below relating to this. It was posted yesterday. No one seems to know who is buying the bulk of recent auctions. In a truly free market - this wouldn't be a mystery.

Ladies and gentlemen, this is a very big shoe that just dropped. This is not theory or speculation - this is very real - and we are staring into a very real abyss. If the U.S. cannot fund its growing deficit - the party is over. No more low interest rates, no more stable currency, no more stock markets, no more ridiculous consumption rates, no more ridiculous budget deficits - and this will have a worldwide economic impact. Of course - most people have no real knowledge of what is happening below the surface due to all of the media spin - so our stock market continues to rise. At some point, it will be impossible to hide what is happening - and people will panic - and markets will fall. It seems that we have learned nothing from history. The parallels between now and 1929 are ominous.

Our economic system is collapsing - there's no other way to say it. The pace of collapse has recently slowed - but I believe we're now very close to being pushed off the ledge.

jg – July 30, 2009
US 5yr Bond Auction Effectively FAILS

Wed. July 29, 2009

Posted by Karl Denninger

That's right, FAILS.

No, you didn't hear it reported this way and won't, but that's the math.

Here you have the results:

And here's the math:

1.923 BTC X 61.59% Primary Dealer bid = 1.18 BTC (PD), greater than 1.0. Or to put it a different way, but for the primary dealers the bid-to-cover was less than one, meaning that some of the issue would have been left on the table.

Thats a fail; but for the primary dealers the issue would not have subscribed.

Primary dealers are required to bid. That's the deal in exchange for their being named as "primary dealers." For this reason short of thermonuclear war you will never see an actual (BTC < 1.0) "fail" on a US Treasury Auction - Treasury has rigged the process so as to insure that cannot be reported. Therefore, the question is this: Less the primary dealer "bid" (forced by agreement) was there sufficient interest to subscribe the issue, and the answer is NO.

Those who think this is "no big deal" need to have their head examined. In general any BTC under 2.0 indicates a serious problem, and the perverse nature of the primary dealer system is the reason. The United States' Credit Card (issued by China and Japan) is being slowly cut off. That the stock market "recovered" after this ridiculously bad auction (bow-wow is the best way to describe it) speaks to the vacuum between the ears of both the cheerleaders in the mainstream media and those in the equity markets.
There is only one other time in recent memory that we've had a bond market auction fail like this. You might want to go have a look at your charts - with dates - for what followed shortly thereafter. They're going to try to sell 7yrs tomorrow, and then the real fun begins with the quarterly refunding.

That ought to be a real riot.

President Obama, you might want to have a chat with Bill Clinton about the Bond Market and Hillarycare, lest you wind up learning this lesson the hard way.


Nathan's Economic Edge

Bond and dollar futures are both higher. Higher during a week that they are issuing $235 billion??? Now here’s my question… how do we finance $235 billion of bond auctions in one week – WHERE DOES THE MONEY COME FROM? Well, if we look at the bid results, we find that the Primary Dealers (PDs) are doing more and more buying each week. And when we look at the TIC data, we find that international buyers are doing more selling than buying. So, if the money to buy such massive issuances is coming from the PDs, then they have to be using their own cash or equivalents to buy them – correct?

So, let’s go and look at the balance sheets of the biggest Primary Dealers and see how much cash they possess… Let’s start with JPM. Here’s their balance sheet from their 2008 Annual Report, page 131:

It shows roughly $27 billion in immediate cash.

Now let’s look at the balance sheet of Goldman Sachs:

Here we find $35.4 billion of cash and cash equivalents. Hmmm… Okay, let’s say that the 5 biggest each have that amount – 5 times 35.4 = $177 billion. Of course they can’t place 100% of their cash and equivalents in long term bonds, so I would assume that only a fraction of that money would actually be available to buy at auctions. Of course there are their "trading assets" which we have no idea how they are used. But my premise is that week after week of $100 billion or now $200+ billion auctions cannot be supported by the money that the Primary Dealers possess.

So again, WHERE’S THE MONEY COMING FROM? Since I can’t see where the money is coming from, I’m going to throw a wild guess out there and say that the government and PDs are simply printing it as they go! How much? WAY, WAY more than the announced use of Bernanke’s $300 billion. Sound like a conspiracy theory? It is, and I invite the Fed, the Treasury, and the Primary Dealers to open their books and prove me wrong. I want to see a paper trail leading to the purchase of those bonds and treasuries!

This is a vitally important question to have answered for the future of our country – CRITICAL.

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