More on the Bond Auction
Yesterday I wrote a piece about the ignominious and ignoble conclusion of the quarterly refunding with the horrrific result of the 30 year bond auction. I noted that the “tail” cost the taxpayers $175,000,000 and that article has received modest circulation in the economic blogosphere.I just want to point out that there are times when the bidding process can also result in an outcome favorable to the taxpayers. Such a result occurred Monday in the 3 year note auction.
That issue produced an average yield which was about 4 basis points lower than the yield at which the issue was changing hands in the market just prior to the auction.
On a 3 year note each basis point is worth $292. Consequently, the four basis points are worth $1168 per million bonds. On the entire $25 billion that is a saving of a little more than $29 million.
That raises the question of why someone would bid four basis points more expensive than where the issue is trading in the market.
Suppose that you have a substantial short position and must cover. You submit a bid several basis points rich to market levels because you want a degree of certainty that you will be awarded the bonds. You do not want to risk missing and not receiving all or some of what you need.
The problem with that strategy is illustrated by the result of the Monday auction. If a substantial number of other bidders follow the same course you can then be saddled with expensive paper.
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This article has 1 comment:
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Zooey
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786 Comments
Nov 14 04:49 PM