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DID WALL STREET FLIP OFF TREASURY TODAY??!!

By Larry Doyle on March 25, 2009 at 11:30 PM in Economy, Sense on Cents (Larry Doyle blog), U.S. Treasury, Wall Street

The U.S. Treasury was heavily involved in the bond market today. How did they do? They bought high and sold low. What happened?

Treasury announced last week that they would engage in buying hundreds of billions of government and mortgage securities in an attempt to move interest rates lower and spark consumer and corporate borrowing. Today, Treasury made their initial purchase under this program at mid-morning. Thanks to MB, I learned that Wall Street offered Treasury three times more bonds than Treasury actually purchased. I gather that Treasury wanted to be extremely patient and diligent in their purchases. In any event, at mid-morning the U.S. Treasury would have bought bonds near the market highs of the day.

Later in the day, Treasury issued multiple billions in 5yr notes. How did they do with this sale? Not very well. Wall Street backed up their bids an almost unheard of 5 basis points (.05%) to fully underwrite these bonds. What happened?

In talking with a few friends (thank you, gentlemen), speculation is that Wall Street backed their bids up by 5 basis points (total cost to Treasury of a not insignificant $78 million) for three reasons:

1. Concern that Treasury did not buy more bonds in the morning;

2. Concern over a failed 40 year U.K government bond auction. This failed auction highlights the overwhelming supply coming to market across global government markets, as well as the fiscal problems in the United Kingdom. (please see my earlier post/video clip today: Daniel Hannan Skewers Gordon Brown.)

3. Strong speculation that Wall Street was sending a clear signal to Treasury in response to proposed legislation taxing Wall Street executives at rates of 70% to 90%. Message delivered being that Washington needs Wall Street just as Wall Street may need Washington.

Don’t think that a situation like that could not happen. There is always pre-auction talk about potential strength or weakness of upcoming auctions. If word was getting around that an auction was expected to tail (go poorly), it often can become a self-fulfilling prophecy without it being a coordinated conspiracy.

LD