US Treasury Auctions

Lawsuit accuses 22 banks of manipulating U.S. Treasury auctions:

When the federal government, the US Treasury, sells Treasury bills, notes, or bonds, it is similar to a stock Initial Public Offering (IPO), however, instead of the investment banks acting as middlemen between the companies and the investing public in an IPO, in every Treasury bond auction, the primary dealer banks are acting as middlemen between the Treasury and the investing public. As per tradition, prior to every Treasury bond auction, the Treasury bond traders are communicating with each other, these days, they are mostly Bloomberg ‘Instant Messaging’ (IMing) each other about that upcoming auction. Treasury bond traders of major Wall Street financial institutions, like the big banks, or ‘primary dealers’, similar to the syndicate of underwriters in an IPO, are required to have skin in the game and bid, known as ‘competitive bidding’, or placing ‘tenders’, in each Treasury bond auction. Treasury bond traders are not only in contact with other Treasury bond traders, but also with their customers, their brokers, or anyone else that could help them get a feel of the market, similar to the ‘cooling off’ period right before every IPO when the syndicate ascertains the interest in the new issue…

At 1PM on the day of the Treasury bond auction, the final details of the auction, is announced. In those details, called the ‘results’, a measure known as the ‘tail’ is calculated. The tail is the spread, in basis points (100 basis points equals 1%), between the ‘spot’ price, known as the ’when-issued’ (WI) yield of that newly issued Treasury bond in the trading screens when the results of the auction are announced, and the ‘high yield’, (also called the ‘draw’ price or the ‘stop’). In a single price ‘Dutch’ auction system, the Treasury fills all bids from the highest dollar price / lowest yield down to the lowest dollar price / highest yield until the full amount of the new Treasury bond that is being sold, is raised. The ‘draw price’ or ’high yield’ is the lowest dollar price / highest yield, of the competitive bids, that the Treasury needed to accept to complete the sale of that Treasury bond, and the Treasury allocates the new bonds to those bidders at that same ‘draw price’ / ‘high yield’. Furthermore, from that ‘high yield’, the next lower rate, in eighths (a throwback to 1784 when victorious new world US colonies still without a US Constitution issued government debt and Spanish ‘pieces of eight’ were commonly accepted as currency), becomes the ‘coupon’, or the interest rate of that newly issued Treasury bond that will then start trading on the ‘secondary market’…

A ‘tail’ indicates weak demand with demand being inversely related to the size of the tail. The larger the tail, the less demand for the bond. Whenever an auction is said to have tailed, it indicates a lack of demand, and the larger the tail, the ‘worse’ that auction is said to have been. If that Treasury bond auction had a large ‘tail’, it is considered to be a bad auction, or more precisely, the US federal government had a bad auction, because a bad auction means a higher coupon rate was needed to fill the order and sell out the issue. Another way of putting it, a bad auction means the US federal government, supposedly the ‘US taxpayer’ (using gold-standard mentality), theoretically got taken to the woodshed, and will pay out higher interest payments for the duration of that bond…

A bad auction, however, is a good auction for the dealers at the banks that are buying these bonds. The tail is the extra commission, or markup, that the banks that successfully bid for the bonds, and were just assigned the bonds at a lower dollar price / higher yield, due to the weaker demand, are in the money. If that price of the bond assigned to the Treasury bond trader after the auction, if that ’draw price’ / ‘high yield’ is higher than the ’spot’ dollar price / the ’When-Issued’ (WI) yield trading on the screens in the Treasury market at that same time, the more that difference, the larger that tail, the more money the bank makes (interest rates are opposite of price, reverse the two, the ’high yield’ in price, in dollars, or ’32nds’ price, is lower than the spot price in dollars, or ’32nds’ price). The bank then sells the bonds it was assigned, that it just bought, immediately after the auction. That difference, in the ‘high yield’ or ‘draw price’ they are charged for the bonds they were just assigned to, and WI spot prices flashing in the trading screens, that difference, is how much money the bond dealer pockets. How much the bond dealer pockets is how badly the US taxpayer ‘overpaid’ (using gold-standard mentality), but the post-gold-standard reality is how badly the US taxpayer’s purchasing power of their dollars ‘shrunk’. The bond dealers don’t get to keep all that money they pocketed for long. Similar to an IPO, where underwriters, if they think an IPO will be successful, usually pad the pockets of their favorite institutional client with shares at the IPO price, the Treasury bond dealers also wet some beaks. Especially after a bad auction, the dealer’s clients, the buy-side firms like pension funds, institutional investors (hedge fund ‘stars and bond ‘kings’) stick their guns in the dealer’s ribs and make them hand it over in the form of marking up or marking down bond quotes bid to them or offered to them (if the banks want to keep seeing business flow).

OK, all that was the easy part, and if you followed it, if you understand modern monetary theory (MMT), then maybe you can consider this: Since 8/15/1971, the dollar is no longer convertible to gold, nor fixed to anything, so there really is no longer any need to hold an ‘auction’ to sell Treasury ‘debt’, because in the post-gold-standard, modern monetary system, the federal government, the issuer of dollars, no longer needs to ‘borrow’ dollars (backed by gold). The federal government, the issuer of dollars, will never run out of dollars (no longer backed by gold). After an IPO, the companies are not in ‘debt’ of the stock they just issued. There is no ‘budget’ of how many shares of stock a company can issue. IBM isn’t in ‘debt’ of IBM shares of stock because IBM is the issuer of IBM stock.  The federal government, now the issuer of dollars that are nonconvertible and free-floating since 1971, no longer has any debt in dollars, because all Treasury bonds are denominated in dollars. The federal government no longer needs to ‘get’ dollars from anyone. Today, when anyone buys a Treasury bond, it is just like buying a certificate of deposit (CD) at any bank, except buying a CD at the Federal Reserve Bank is called buying a ‘Treasury bond’. Prior to 1971, whenever the federal government deficit spent, it was a credit, an increase, to the outstanding float of debt; but after 1971, whenever the federal government deficit spends, it is just a debit, a decrease, in the purchasing power of the outstanding float of dollars. The ‘national debt’ became nothing but a ‘national debit’ (of total dollars simply created by fiat and added to the money supply). Treasury bond auctions are now just an anachronism, a vestige of a bygone era, so in my opinion, it would be better to just end the charade, and level with the American people. Until then, we’ll get articles about ‘investigations’ over the banks ‘manipulating’ the Treasury bond market, and meanwhile, an entire nation remaining spooked about some ‘unsustainable debt’ that endangers the financial security of the country which will only fuel even more political gridlock and government shutdowns.

US Treasury bond liquidity ‘deterioration’

Here’s a link to Yellen’s 58 page Fed report released Wednesday before giving her 2-day semi-annual testimony to both the House and Senate. Page 20 has her take on Treasury bond market ‘liquidity deterioration’ (allegedly caused by recent government regulation). She writes that changes in electronic trading technologies by broker/dealers and the composition of market participants that has changed over the past decade, and not recent regulatory changes, is your reason. She nonetheless agrees that the ratio of Treasury trading volumes to outstanding Treasury securities has decreased, however, it is most likely caused by Fed purchases (LSAP), increased internalization of dealer flows (dark pools), and rising demand from buy & hold investors (rise of index fund popularity). Instead of recent regulation, she concludes, one should look to the rise of high frequency trading (HFT) for your real cause of exacerbating the Treasury bond liquidity deterioration, especially during periods of market turbulence.

The Real Greek Tragedy

The real tragedy is that not enough people understand Modern Monetary Theory (MMT)…All that was needed was a temporary ‘Grexit timeout’, a Euro to Drachma ‘adjustment mechanism’, (a simple switch from a ‘user of currency’ back to an ‘issuer of currency’). A weaker drachma would instantly increase demand for Greece’s exports and Greece tourism, immediately put Greece’s economy back on the road to recovery, and instill confidence with a clearer path instead of this Greek drama by Greece policymakers too afraid to make the tough decisions, the needed reforms, on their own.

Kind words about The National Deb(i)t

ByJ. L. Gaddis “The Other Jim”on June 20, 2015

This book puts to rest the confusion and misinformation that most of us have long felt concerning the US federal “debt”. What a great title – it tells the entire story in three words – The National Deb(i)t. The federal debt is not actually debt at all, but rather just an accounting of the number of dollars injected into the US economy by the federal government since the founding of the country, that is, the total debit of the US spending account. It clearly shows why the federal debt is not debt, why it never need be “repaid”, why it is not a threat but an asset to our children and grandchildren, and why without it the private sector would be destitute. Every US Senator, Representative, executive , and candidates for those offices should read and absorb the premises laid out in this startling story.
Much Appreciated JG—eddie delzio

A centralized solution in a decentralized Eurozone.

Instead of making the hard choices, the unpopular reforms, and the needed tough love to put Greece on the path to economic recovery right away, Greece’s policymakers took the easy route. Alexis Tsipras and former finance minister Yanis Varoufakis created the narrative that their own people’s profligate spending, tax evasion, corruption, and wanting to collect pensions at age 50, which over decades has now nearly bankrupted the country, was not their fault at all, it was someone else’s fault. Greek policymakers conjured up bogeymen like the German ‘paymasters’ and ECB ‘blackmailers’, to distract the Greek people instead of doing the much harder job of leading them on a path to recovery. Since it is now obvious that other grownups on the outside will have to make the long-term decisions that solve Greece’s problems, here is my suggestion (my prediction what you will see happen in the Eurozone by the year 2030) that I posted on my LinkedIn page in March:

eddie delzio