US 30 year Bond Auction Dismal

Today the Treasury auctioned off $16 billion in 30 year bonds, you may recall this is also about the duration that Operation Twist was to buy, except operation twist has been a dismal failure thus far.

I bring you this rather bore-some news for a specific reason, which I will get to.

According to Reuters

An auction of 30-year Treasury bonds on Thursday was met with the second lowest demand of the past year as historically low yields kept buyers away.


The auction of $16 billion of the bonds brought a bid-to-cover ratio, a gauge of demand, of 2.49, which was the lowest since a bid-to-cover of 2.08 in an August auction and the second lowest since a bid-to-cover of 2.31 in November 2010.


The auction brought a high yield of 3.199 percent, which was above where 30-year bond yields were trading in the "when-issued" market at the time of the sale


Further Internals


Dealers had to buy well over half again or 55.7% with Indirects taking a meager 28.4%, and the remaining 15.8% going to Directs,


 Perhaps the global banks, in an attempt to preserve the Ponzi one more time, pushed all their freely allocatable and repoable capital into Italy and had far less left for long US paper.


Here's the definition of the 3 bond buyers, Indirects, Directs and Primary Dealers:


1.  Direct Buyers: folks who buy straight from the Treasury, typically comprising a minor stake in US debt purchases

2.  Indirect Buyers: folks who buy LARGE chunks of US debt, typically Foreign Governments

3.  Primary Dealers: banks that HAVE to buy US debt to insure an auction doesn’t fail. You don’t want to see a lot of Primary Dealer purchases as this means that those who can CHOOSE to buy US debt DON’T want to.
 


What this means to the market:


First as pointed out just about a week or so ago when the F-E-D released their custodial foreign accounts, they showed, as I have been making the case, that European governments and especially banks, the Indirect Bidders (#2)  have been selling anything not nailed down to meet the new capital requirements they have been ordered to meet. 


Because the EU banks are trading at less then half of book value they don't want to issue new shares and they would almost certainly be locked out of the capital markets any way. So these foreign entities have been selling everything that is not nailed down and especially in the $USD denominated space as evidenced by the huge plunge, first in the PRIMEX index and secondly by the F-E-D's foreign custodial account which showed a record number of sales as EU banks desperately try to recapitalize to the tune of almost 100% more then their current market cap. 


Foreign entities, Indirect Bidders, can't be liquidating US treasuries and expected to be buying them at the same time. Furthermore, Congress recently threw a bee-hive in to China with the currency manipulator legislation, so China, an indirect, is not likely to be an active bidder if for no other reason then pure spite.


This, I hope, demonstrates the lack of capital at EU banks with unknown exposure to toxic debt as well as an unknown amount of CDS they have written. You would think the first thing the EU would do would be to get a grasp on the size of the problem they are dealing with, but to date, none of the stress tests have included CDS so long as they are kept in non-trading accounts, this is what endangers the AAA credit rating of Austria as their main bank, ERSTE, had to come clean about how much liability they are exposed to due to CDS alone that they did not declare during the stress tests (2 of them!).


It's no wonder that US Treasury auctions look horrible and that is not likely to change any time soon, it is bigger then US problems such as the idiots in the super committee (this will be the next US financial crisis). However, it is more indicative of the trouble Europe is in, and perhaps it may indicate that China, besides being spiteful, may have some problems of their own as recent data has suggested.