Libor in the UK, Treasury auctions in the US. WTF!!!
Twenty-two financial companies that have served as primary dealers of U.S. Treasury securities were sued in federal court on Thursday, in what was described as the first nationwide class action alleging a conspiracy to manipulate Treasury auctions that harmed both investors and borrowers.…
According to the pension fund's complaint, filed in U.S. District Court in New York, the banks used chat rooms, instant messages and other means to swap confidential customer information and coordinate trading strategies in the roughly $12.5 trillion Treasury market.
This enabled the banks to inflate prices on Treasuries they sold to investors in the pre-auction "when issued" market, and deflate prices when they bought Treasuries to cover their pre-auction sales, violating antitrust laws, according to the complaint.
Primary dealers are the banks authorized to transact directly with the Federal Reserve. They are big players in Treasury bond auctions and act as market makers in the secondary market…
Media reports last month said the Justice Department was also investigating possible collusion in Treasury auctions.…
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ReplyDeleteI'm curious if this lawsuit is a one-off or actually divulges how detrimentally tight-knit the dealers, their clients, and the Treasury bond brokers are....
ReplyDeleteFirst, a primer: Every auction, where dealers and their brokers are Bloomberg 'Instant Messaging' (IMing) each other, the details of the auction, the 'results', include a measure known as the 'tail'. The tail is the spread, in basis points, between the 'when-issued' (WI) yield of the Treasury security just prior to auction, and the highest yield, also called 'the stop', of the auction. 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 auction had a large 'tail', it is considered to be a bad auction, or more precisely, the US taxpayer had a bad auction, because a bad auction theoretically means the taxpayer got taken to the woodshed, in the form of higher rates that the US federal government, supposedly the 'US taxpayer' (using gold-standard mentality), will pay out in 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 bid for the bonds, and are assigned the bonds at these higher rates, due to the weaker demand, have made. If the set interest rate of that bond the US federal government is selling to the banks for the price they bid, or, the 'draw' rate, (that rate of the bond announced right after the auction), if that rate is higher than the spot price, trading on the screens in the Treasury market at that same time, the 'When-Issued' (WI) yield (the 'spot' rate), the more that difference, the more money the dealer at the bank makes (interest rates are opposite of price, reverse the two, the draw rate in price, in cash dollar 32nds, is lower than the spot price in dollar 32nds, so the bank, the Primary Dealer that bid and bought the bonds is lower than the spot price)...
The bank then then sells the bonds it bought immediately after the auction. That difference, in what they bid, or the draw price (whatever they are charged for the bonds they bid for), that price and WI spot prices, that difference, is how much money the dealer pockets, and how badly the US taxpayer 'overpaid' using gold-standard mentality, but in reality (post-gold-standard mentality) 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. Soon afterwards, their 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)...
Any US treasury broker with only a couple years experience could give you multiple reasons how Treasury traders are manipulating U.S. Treasury auctions, but that's not gonna happen (I know because I have 30+ years experience as a US Treasury bond broker and I now understand MMT).
If true, that's amazingly educational Ed. Thank you for the expose.
ReplyDeleteI'll withhold judgement until the lawsuit verdict comes in. If it fits recent outcomes, there'll be a negotiated settlement before too much damaging information is divulged.
Edward Delzio said...
ReplyDeleteI'm curious if this lawsuit is a one-off or actually divulges how detrimentally tight-knit the dealers, their clients, and the Treasury bond brokers are....
Thank you Edward Delzio for the detailed walk through, very enlightening.
I have to think that any details deemed detrimental to the affected parties will never see the light of day.
Business as usual.
What's funny of course is that it is all completely pointless. You offer 'retirement accounts' at National savings at an interest rate, and people can take them or leave them.
ReplyDeleteAll these manipulating middlemen then have to go and get proper jobs producing real stuff.