Where and How to Analyze Treasury Auction Results

Following An Introduction to Treasury Auctions and The Recent Treasury Auction Brouhaha, I have received several requests from readers on where to obtain the relevant auction data and how to calculate the yield, bid-to-cover ratio and percentage of indirect bidders. It would be nice if there were an archived table of all this information, but the table of results for recent Treasury Note auctions omits both the bid-to-cover ratio and percentage of indirect bidders.

As best as I can determine, anyone seeking to capture the history of auctions for a particular bond needs to do so manually. I will quickly walk through how this can be done. First, start by selecting a particular security in the Search by Security Type list at the page with the title Treasury Marketable Security Offering Announcement Press Releases. Selecting the 2-Year Notes will bring up a page with all the data grouped by calendar year. Clicking on 2009 brings you to 2009 Treasury Security Auction Press Releases: 2-Year Notes. On this page, each auction date has three rows associated with it: Announcement; Prelim. Noncomp. Results; and Auction Results.

By selecting the PDF version of the 9/22 auction results, I can pull up today’s auction data. The yield to focus on is the High Yield, which was 1.034% for today’s auction. At the very bottom left, the press release notes the bid-to-cover ratio of 3.23 and provides the source data for the numerator and denominator. Finally, the percentage of indirect bidders is not calculated in the press release, but can be easily computed by dividing the Indirect Bidder – Accepted number by the Total Competitive – Accepted number. Today, that translated into an indirect bidder percentage of 45.2%.

Of course the best way to analyze the numbers is to watch and see how the market reacts to the prices and yields not just for the bond in question, but across the entire yield curve. In evaluating bid-to-cover ratios and the percentage of indirect bidders, analysts tend to compare the current auction to the most recent auction of the same security and to an average of the past 10-12 auctions of that security.

For two superb blogs with a bond focus, I continue to recommend:

• Across the Curve
• Accrued Interest

[source: TreasuryDirect]

The Recent Treasury Auction Brouhaha

In yesterday’s An Introduction to Treasury Auctions, my intent was to provide some background information on Treasury auctions that might be appropriate to get an equity-centric investor up to speed on the basics.

I know from personal experience that it is easy to define one’s investment universe as consisting entirely of stocks, but if we have learned anything in the past year, it is that erecting artificial boundaries to one’s investment knowledge dramatically increases the risk of getting blindsided in any asset class.

So with the introduction out of the way and with the considerable encouragement of a number of readers, let me turn to some interesting recent developments that have created quite a stir in the bond circles.

The issue of foreign demand for U.S. debt has loomed large during the course of the financial crisis. One of the early flash points was the deterioration and eventual government bailout of Fannie Mae and Freddie Mac. At that time, approximately 10% of China’s GDP was invested in bonds issued by Fannie Mae and Freddie Mac, which was probably the reason why Treasury Secretary Henry Paulson felt the need to explain:

“Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe. [emphasis added]”

As noted yesterday, China and Japan each account for about 1/3 of the U.S. Treasury debt held by foreign nations. Since the beginning of the financial crisis, there have been rumblings that interest in U.S. debt may be waning in the Treasury’s two largest customers – an issue that was summarized nicely by Keith Bradsher of the New York Times at the beginning of the year in China Losing Taste for Debt from U.S. The most recent data available show that China, the largest customer of U.S. Treasury securities, reduced its holdings from $801.5 in May to $776.4 in June.

The issue became a little stickier when the Fed decided to change the manner in which it reports data from indirect bidders on June 1^st. In Is Foreign Demand as Solid as It Looks? Min Zeng of the Wall Street Journal claimed that the new reporting standards which expanded the definition of indirect bidders made it more difficult to determine the level of foreign demand.

Skipping ahead to the punch line, the most interesting recent claim of note comes from Chris Martenson, whose The Shell Game – How the Federal Reserve Is Monetizing Debt makes the case that the Federal Reserve is using a custody account to enable foreign central banks to swap agency debt for Treasury debt. If this turns out to be the true, it will undoubtedly have some very interesting implications.

For those seeking out additional background and context, the following will likely be of interest:

• The Fed Buys Last Week’s Treasury Notes (Chris Martenson)
• The Fed’s UST-POMO Pyramid Scheme Exposed (Zero Hedge)
• Open Market Operations and Statistics (Zero Hedge)
• Monetizing the Debt: Disinformation in the Blogosphere (John Jansen)
• Treasuries Rally on Solid Demand for 7-Year Auction (Deborah Lynn Blumberg)
• “Lending” a Helping Hand (Brian Benton)
• Double Secret QE (Tracy Alloway)

An Introduction to Treasury Auctions

It remains to be seen whether the growing U.S. Department of the Treasury auctions will be a relatively quiet sideshow or eventually take the center stage in the ongoing financial crisis. As the number of potential disaster scenarios continues to shrink, one subject that I see receive surprisingly little play in the blogosphere is one of the few remaining potential disasters: the auction of U.S. debt.

The concern is that as the U.S. debt grows, so does the volume of Treasury debt for each auction. The big fear is that at some point the supply of U.S. debt may begin to outstrip the demand. At the moment, China and Japan account for about 2/3 of all foreign holdings of U.S. Treasuries; any plateau in the demand for U.S. debt from these two nations might necessitate higher interest rates to stimulate demand and could send potentially traumatic shock waves throughout the economy. This is the disaster scenario. So far, I am happy to report, demand for Treasuries has been robust and yields have remained at very low levels.

The U.S. Treasury auctions a mixture of Treasury Bills (with maturities from 4 weeks to 52 weeks), Treasury Notes (from 2 to 10 years) and 30-Year Treasury Bonds. The T-Bills are auctioned on what is largely a weekly cycle, with the typical pattern seeing the 13-week and 26-week T-Bills slotted for Mondays and the 4-week and 52-week T-Bills on Tuesdays. Given the frequency of these T-Bill auctions and the relatively low demand from foreign central banks, the T-Bill auctions are probably the least important auctions in terms of being able to gauge market sentiment and the strength of foreign demand.

The more important auctions are of the Treasury Notes, where the 10-Year Note has become the de-facto benchmark for U.S. long-term debt. Treasury Note auctions are best understood as occurring on a monthly cycle, with the 3-Year and 10-Year Notes typically auctioned on Tuesdays and Wednesdays during the second week of each month and the 2-Year, 5-Year and 7-Year Notes typically auctioned off on Tuesdays, Wednesdays and Thursdays of the last week of each month.

The 30-Year Bond and Treasury Inflation Protected Securities (TIPS) are a much smaller part of the Treasury refunding process and are subjects for another post.

The results of Treasury auctions are announced at 1:00 p.m. ET (see Announcement & Results Press Releases) and contain three particularly important pieces of information:

1. Yield
2. Bid-to-cover ratio
3. Percentage of indirect bidders

In short, the yield determines the cost of the debt refunding and/or the price sensitivity of the bidders. The bid-to-cover ratio is simply the total dollar amount of the bids tendered by the total amount of the securities being auction and reflects demand relative to supply. Finally, the percentage of indirect bidders is used as a proxy for demand from foreign central banks, as indirect bids are bids of significant size that do not go through the primary dealer community.

Going forward, investors should keep an eye on the Treasury auctions, particularly on the demand for U.S. Treasury Notes. Should yields start rising, bid-to-cover ratios start falling and participation by indirect bidders begin to decline, then we may have the beginnings of a new kind of debt crisis on our hands.

For additional information on Treasury auctions, try:

• Tentative Auction Schedule of U.S. Treasury Securities
• Recent Results for Notes, Bonds and TIPS Auctions
• Today’s Auction Results
• Recent Results for Bill Auctions
• Announcements & Results Press Releases
• Major Foreign Holders of Treasury Securities
• Who Buys Treasury Securities at Auction?

For some VIX and More posts on TIPS, readers may wish to check out:

• Treasury Inflation-Protected Securities and Inflation Expectations
• Chart of the Week: TIPS Breaking Out