There was some hyperventilating over the long end of the curve yesterday as investors sold long bonds due to rumors that the 30 year bond auction might not go so well today. Of course, regular readers know that these auctions are designed not to fail. Reserves, that have been spent into existence, are merely being targeted. All the Fed and Treasury have to do is keep close tabs on these reserves, track them down and hoover them up. And the process they use to do this is highly coordinated.
My guess is the 30 year bond auction will come in with a very solid bid to cover (1:1 is all that’s required, but 2:1 is generally the norm), will be well oversubscribed and that market participants will hyperventilate about it regardless. Various pundits will grade the auction, confirm that the USA can survive another day and then we can then all get back to leveraging up via USD, shorting US treasuries and buying the equity dips. We’re still not bankrupt! Whew!
Update: Bid-to-Cover Ratio: $36,921,884,600/$16,000,004,600 = 2.31. Yields up a bit, but not surprisingly as investors recognize that the reaction to QE2 on the long end was overdone. If I could IPO a company every day and get $2.31 of demand for every $1 offered I’d be ecstatic. Only in the government bond market can an auction be well oversubscribed and have so many people discussing future failed bond auctions. It’s practically laughable.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.