Mainstream media pundits have been crying in their beer over the past several days over investors running away from short term Treasury paper because of default fears. They cite the huge rise in the rates on T-bills, which exploded all the way up to six one hundredths of one percent on the 26 week bill. That’s right .006 on the 6 month bill and .0035 on the 13 week bills. Those rates, by the way, have only been lower in 5 auctions this year. I mean, you can just see the mass panic in those rates. Run away! Run away!
Today the pundits are citing as evidence the fact that bid/cover ratios at yesterday’s 13 week and 26 week bill auctions were the lowest since last year. What they fail to say is that the government increased the size of the auctions by $15 billion over last week to the largest since April at $65 billion. that’s a 30% increase in size. If you increase supply, then bid/cover ratios will fall even if demand remains the same. Likewise yields will rise a bit, even if demand is stable, simply because supply increased. That’s basic price theory folks. It’s called the Law of Supply, and the last I looked Congress hasn’t repealed it yet.
The fact is that demand for the weekly bills was actually greater than last week. The total bid tendered for the two auctions was $267.7 billion this week. It was just $231.1 billion last week. So much for investors shying away from T-bills this week. To be fair the totals for both weeks were impacted to a degree by the issuance of $25 billion in 7 day bills last week. That paper is somewhat competitive with the longer period bills, but not entirely, and that $25 billion will come back this Thursday. Subtracting the $25 billion cash coming back to the holders of the 7 day paper from the total bid this week leaves the net bid at about $243 billion, still greater than last week’s bid.
The bid tendered was greater in all 3 bidder classes, dealers, direct bidders, and indirect bidders. This was especially the case among indirect bidders, where the bid this week was more double last week’s indirect bid tendered. Indirect bidders include most foreign central banks and other investors submitting bids through dealers.
Compared with the auctions two weeks ago, this week was $12 billion higher than the $255 billion bid then. Yes, the $25 billion from the 7 day bill is probably coming back assuming the Treasury doesn’t announce a replacement. So there’s some polluting of that comparison as well. But overall, there’s no evidence of any material reduction in demand for Treasury Bills this week–no sign of any concern whatsoever among the buyers of T-bills that the government won’t pay its bills, at least these bills.
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POSTSCRIPT- At 11 AM the Treasury announced a 5 day bill of $35 billion to roll over the 7 day bill and add an additional $10 billion in supply. The doubling of the supply of very short term paper in the past week has caused the rate on 4 week paper to spike. Mainstream media reporters are melting down in panic. They are peeing their pants and shitting their drawers on the rate spike. Not one story has reported that it just might be due to the doubling of short term paper supply. Financial journalism at its finest.
The results of the 4 week bill auction showed a drop of $26 billion in the total bid versus last week. In order to tell if demand is really down, the 5 day bill auction results tomorrow should provide a tell. The total bid at that auction plus the bid on the 4 week bill compared with last week’s bid on the 4 week plus 7 day bills will give some indication if demand is really down.
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