3 Year UST Auction

In keeping an eye on these auctions, we are keeping an eye on the flight to safety financial institutions are undertaking (remember the 4 week note which was 9x oversubscribed and placed at 0% yield-essentially banks are parking money at the Treasury in a flight to safety as any other place in the financial system must be scaring the heck out of them).

Today's 3 year $32 billion dollar auction is notable for several reasons, the first of which is that it breaks the debt ceiling (as of last week the Treasury was only $25 billion away from breaching the debt ceiling).

Second and attracting a lot of attention was the new record set in the auction's bid to cover ratio coming in at 3.73 vs previous 3.624 (the bid to cover is the number or amount of bids that came in vs those accepted by the Treasury-anythng above 2 is considered a successful auction).

The yield for 3 year debt (and keep in mind this is debt that is above and beyond the debt ceiling) priced from .276 to .37%. Imagine that! Holding 3 year debt at just barely above 1/4 of a percent yield, talk about opportunity cost! Again, I think this auction can be classified as a flight to safety rather then any real bullishness toward USTs.

Most of the auction was taken down by Primary Dealers, think Goldman Sachs and the Former MF Global, they took over 56% of the auction, which would be normal under the QE2 regime as they would simply flip the treasuries back to the F_E_D in POMO operations and make billions of dollars for holding the debt until it could be flipped (in some cases as short as a week), but they are obviously buying for a different reason now.

The Direct bidders were notably absent at just over 5% (regular investors, like Grandpa back in the day). This probably should be taken as an indication of American's disposable income. Indirect bidders took about 38% (Think foreign entities, especially central banks).

Back to the debt ceiling, not even an hour after the auction, The Hill comes out with this news:

Obama administration to ask for increase to debt ceiling in a 'matter of days'

The White House will be asking Congress to raise the U.S. borrowing limit by $1.2 trillion. The move would mark the third and final increase from the debt-ceiling deal reached last year by Congress.

I don't know what to expect other then this to be used as an election year dispute of some form. We'll see how this goes down, but as a famous Chicago White House Chief of Staff once said, "Never let a good crisis go to waste".