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Fed Sells $8.9 Billion in Bills At 23 Bid To Cover

Tyler Durden's picture


This is a topic we have touched upon in the past so we won't dwell much on it: last Primary Dealer Bid to Cover in Tuesday's 52-Week Bill  Treasury auction: 6.0x ($15.6 billion allocated to $94.7 billion in tendered bids); Bid to Cover in the just completed reverse POMO in which the Fed sold $8.870 in Bills maturing between August 2012 and March 2013 to $204 billion worth of interest? 23x. The Fed is once again four times more efficient than the Treasury at peddling US paper. Surely that is only to appease Brian Sack and not because there is million in free money to be made on the flip.

Expect to see yet another spike in PD 1-3 year Bill holdings when the New YOrk Fed reports the latest PD holding data next Thursday. Why did this happen? We won't regurgitate and merely repost what we wrote last time.

How is this possible? Is the Fed really 4 times more efficient at
selling bonds than the Treasury? How and why can dealers have such a
huge apetite for paper which yields inside of 0.1% and thus provides
absolutely no real top or bottom line benefits?


Simple. As Zero Hedge has discussed many times in the past, POMO, in
whatever format, be it under LSAP auspices or Operation Twist, is nothing but a taxpayer funded gift to the Dealer community
As a reminder, the actual POMO process is conducted in the form of a
reverse dutch auction, where the collusive Dealer Community (recently
expanded to include 2 more Canadian Banks, BMO and Bank of Nova Scotia,
which simply means that US Taxpayers are now on the hook to bailing out
two more banks which are part of the supposedly safe and stable
Canadian banking system) submits best bids or offers to the Fed,
depending on whether the community is buying or selling bonds. Today,
for the first time, it was buying, so it was Bidding. And while we can
not prove it as the actual details of the price allocation are a
non-public mystery, we are 100% confident that the answer lies precisely
in the risk-free arbitrage, funded by the Fed, and hence the US
taxpayers, consisting of a collusive wholesale bid at prices far lower
than prevailing market rates, and the ability to immediately flip the
bonds to the open market upon allocation for a tidy profit.


How tidy? We have no idea: the data is private. However, it is tidy
enough to generate 4 times more buying interest than would be there
normally. Hence the, pardon the pun, twist.


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Thu, 10/20/2011 - 13:09 | 1793695 FunkyMonkeyBoy
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So, anyway, why's the DOW gone up nearly 80points in minutes? Did someone assassinate Obumma?

Thu, 10/20/2011 - 13:18 | 1793734 GeneMarchbanks
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That's elementary, FunkyMonkeyBoy. You see, after they rape you in a stealthy roundabout way, they funnel the rape profit into a second phase via the NYSE. The first time, you're a helpless victim, the second a willing participant.


Ahhh, freedom...

Thu, 10/20/2011 - 13:21 | 1793745 redpill
redpill's picture

OT: Wouldn't have believed this was America 2011 unless I saw it with my own eyes.


"Where is a terrorist more apt to be found? Not these days on an airplane more likely on the interstate," said Tennessee Department of Safety & Homeland Security Commissioner Bill Gibbons.



"Not only truck drivers, but cars, everybody should be aware of what's going on, on the road," said Gonzales.


What the fuck!!!

Thu, 10/20/2011 - 13:26 | 1793766 john39
john39's picture

just a small taste of what they have planned to keep the masses in line.

Thu, 10/20/2011 - 13:30 | 1793789 NotApplicable
NotApplicable's picture

The only suspicious thing I see are Homeland Security units. Who do I report them to?

Oh, and those electronic billboards with cameras they put up every few miles, with such helpful messages as "Don't drive distracted."

Fri, 10/21/2011 - 03:52 | 1796162 Shock and Awe
Shock and Awe's picture

Wait till it reads:

Wanted: Terrorist 'NotApplicable' driving green color Pontiac Aztec. If you see him collar him.

Thu, 10/20/2011 - 13:40 | 1793804 i-dog
i-dog's picture

What a poster child for America's pursuit of freedom and happiness without corruption or government interference!

From the Commish's wiki bio:


LOL ... Jump you fuckers!!

Thu, 10/20/2011 - 13:38 | 1793860 ziggy59
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Think of all the welcome signs at all of the international airports and immigration that will need editing..

Welcome To AmeriKa.

Big bux and employment potential

Thu, 10/20/2011 - 15:23 | 1794392 chubbar
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Borders are still wide open, still passing out 1 million work visas/year. Yeah, I'm about to believe these fucking assholes are worried about terrorists.

Thu, 10/20/2011 - 15:03 | 1794320 zorba THE GREEK
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FMB...If someone popped the O, the market would be up 800 points, minimum.

Thu, 10/20/2011 - 13:09 | 1793697 eureka
eureka's picture

There's a solution - backed by the Tea Party -


Brian Hickey of the Independence Tea Party rejects Occupy Wall Street: "The idea that Wall Street is the root of all evil is an anathema to us."

Thu, 10/20/2011 - 13:17 | 1793732 PivotalTrades
PivotalTrades's picture

The problem is the government, the Tea Party is for a smaller govenment, no government bailouts. What don't you understand. 

Thu, 10/20/2011 - 13:21 | 1793743 Biosci
Biosci's picture

What I understand is that it's silly to treat Wall Street and DC as if they were separate, independent entities.

Thu, 10/20/2011 - 13:24 | 1793756 fuu
fuu's picture

DC is the ugly, dim-witted, little brother of WS. It just sits in the corner picking its nose until WS needs some cover, diversion, or money.

Thu, 10/20/2011 - 13:26 | 1793767 PivotalTrades
PivotalTrades's picture

As soon as people like you stop electing democrats llike Doddd, Franks and Schumer who beleive that the know whats best and can ontroll the economy then Wall strret will be occupied by Capitalist and not croonies, but as long as the OWS crowd continues to vote for the party that wants big Gov then those organizations will take advantage of them.

Thu, 10/20/2011 - 13:30 | 1793793 Biosci
Biosci's picture

So you're saying the GOP is the answer to rampant corruption on Wall St?

Thu, 10/20/2011 - 13:39 | 1793851 PivotalTrades
PivotalTrades's picture

We need to elect people who beleive that Government is not the answere to their needs and desires. For most of my life the GOP represented that view while the Dems were for more government involvment. About this there is no argument

Thu, 10/20/2011 - 13:49 | 1793949 Biosci
Biosci's picture

Who's arguing?  I agree that the GOP has effectively marketed itself as an anti-government party.  It's sort of entertaining to hear that line repeated over and over.  Like pulling the string on an old GI Joe doll^H^H^H^H action figure.  The policies they have implemented are somewhat different, however, but let's not get bogged down in facts.

Here are some sweeping statements that are largely true:  Wall Street is rife with people who want a lot of money.  Washington has access to a lot of money.  Washington is populated by people who need a little money to keep their jobs.  Wall Street sees an opportunity here:  make a small investment for a very, very large return.

Party is irrelevant.  The Wall Street-DC symbiosis is an emergent behavior of the complex adaptive system that is our form of government and method of elections.  It is also highly stable, very resistant to change.  It will kill itself long before it lets outsiders modify it.

Thu, 10/20/2011 - 14:37 | 1794231 PivotalTrades
PivotalTrades's picture

After FDR the demos took a hard turn left and have been expanding the role of gov in this country. The GOP fought the fight but found themselvs loosing as the dems bought their votes. In the last 20 years the GOP has talked the talk but not delevered as both Bush'e were Conservative on social matters only. If the peopl e wood back a party that was for individual responsibility rather than  socialism then this country could return to the country that produced the highest standard of living ever!

Thu, 10/20/2011 - 15:33 | 1794435 Biosci
Biosci's picture

Well played! ;)  (I'm giving you the benefit of the doubt and assuming you can't possibly be serious.)

Thu, 10/20/2011 - 13:41 | 1793881 Smiddywesson
Smiddywesson's picture

TPTB cover all the angles.  They have useful pawns on both sides of every angle that matters.  That's not paranoid, that's just good business.  Most of the major political issues are artifically frothed up to keep the real issues sidelined.  Political parties put you where you are today.

Thu, 10/20/2011 - 14:42 | 1794248 GOSPLAN HERO
GOSPLAN HERO's picture

Not acccording to Alexander Hamilton.

Thu, 10/20/2011 - 15:26 | 1794408 chubbar
chubbar's picture

I would like them to specify BANKERS not just the generic term "Wall street". Not just any BANKERS either, the TBTF banks that are controlled by the banking cartel. The handful of families that control all of these banks need to be outed. Your average stock broker working on Wall street is NOT the same as these idiots so I feel a differentiation must be made before the focus is lost!

Thu, 10/20/2011 - 13:26 | 1793765 eureka
eureka's picture

Do you think stopping bailouts will stop Wall Street from getting free Fed USD and barfing up US garbage paper, CDS, derivatives etc...???

What don't you understand?

That US empire, globalism/militarism & Wall Street/fiat0bubbles, are the elite's con-joined tools for their elevation and the we the people's enslavement...

Do yo not understand that?

Wake up - naive Tea Party people !!!

There can be no US exceptionalism AND freedom - US exceptionalism IS ELITISM -engineered by the elite and executed via Wall Street/DC & Pentagon/CIA.

RON PAUL 2012 - no more bailouts - yes - AND NO MORE FED, CIA & EMPIRE.

Thu, 10/20/2011 - 13:34 | 1793818 PivotalTrades
PivotalTrades's picture

Paul would be an excellent President. The Fed should go! But if you think that the OWS crowd doesn't want the government to take care of them then you need to go back on your meds. The Tea Party is closer  to what you want. A return to the constitution. As to your Rant about the CIA and Empire you are very foolish.

Thu, 10/20/2011 - 13:10 | 1793703 X.inf.capt
X.inf.capt's picture

the fix is in

Thu, 10/20/2011 - 13:13 | 1793713 wandstrasse
wandstrasse's picture

(central) banks are looting the population??? I am shocked, shocked, shocked.

Thu, 10/20/2011 - 13:14 | 1793717 GeneMarchbanks
GeneMarchbanks's picture

Stealthy... and quite sinister.

Thu, 10/20/2011 - 13:22 | 1793751 FinHits
FinHits's picture

I demand to hear Fed's cover story

Thu, 10/20/2011 - 13:24 | 1793755 YesWeKahn
YesWeKahn's picture

Was there anything to cheer about? Why the market is so cheerful?

Thu, 10/20/2011 - 13:50 | 1793960 chdwlch1
chdwlch1's picture

The markets are extatic that the futures expiration date for major indices is tomorrow (10/21)....typical ramp job into the monthly close.

Thu, 10/20/2011 - 13:31 | 1793799 fonestar
fonestar's picture

How long until MillionDollarBonus_ hops on the thread extolling the architects of our angst?

Thu, 10/20/2011 - 13:38 | 1793862 user2011
user2011's picture

I don't understand much about bond and treasury market.   So, does it mean China will be able to get rid of their US treasury easier ?

China stopped buying Treasury in Aug.  And they dumped 60B in September.     My question is whether China has the golden opportunity to further reducing their holding or now.


If so, hyperInflatino won't be that far away.


Thu, 10/20/2011 - 13:53 | 1793986 chdwlch1
chdwlch1's picture

I posted this in an earlier comments helped me to make sense of all the bs going on in the Treasury market.

Last week, the Federal Reserve announced “Operation Twist” which is yet another measure designed to stimulate a moribund economy. However, given that the theoretical foundation for this policy is doubtful, could “the Twist” really be a preemptive response to the ongoing menace of US Treasury bond sales by the Chinese? If so, it might be a smarter idea than it seems.

Operation Twist is simply a Federal Reserve plan to replace $400 billion of short-term US Treasury securities in its portfolio with longer-term securities. Essentially, the Fed will be selling T-bills to buy T-bonds. In doing so, it will bid up the price of T-bonds and drive down their yields thereby reducing long term interest rates. The hope is that this will reduce borrowing costs throughout the economy and help economic recovery.
The problems with this policy strategy are numerous and explain why it fell out of favour fifty years ago. First, in ultra low interest rate environments, a relatively high proportion of any total borrowing cost is the interest rate spread added on top of the government yield to reflect the lesser credit quality of the borrower. So, lowering a government yield of 3% by, say, 25 basis points to 2.75% has limited impact on “high yield” corporate securities currently priced near 8.75%.

A second reason is that government interference in both the short and long term end of the yield curve means that there is no longer a free market in capital, and the “signal effect” of market behavior is lost. While a more comprehensive level of state control may produce valuable results over a brief period of time, the new and completely artificial price of money means that unrealistic excesses in supply or demand will quickly accumulate and, when it is time to remove the controls, the return to normal will be anything but. This tactic guarantees future problems and volatility.

Finally, if engineered lower long-term interest rates do manage to help the economy, it means that future rates will be higher (making bond prices lower) and, thus, smart money will make a graceful exit to avoid capital losses by selling their bonds to the Federal Reserve, leaving the government “long and wrong”. Wall Street wins yet again.

So, why use a flawed policy tool? In recent months, China has seen that the US is very mindful of its vulnerability. In fact, just this week, the US Senate has been threatening to impose trade sanctions on China for having an undervalued currency. Clearly, being a massive borrower is no reason to stop dictating to lenders. This might partly explain why China has expressed an interest in helping out Europe. Perhaps it will be able to garner more influence there if it shifts some assets.

Operation Twist would allow the Chinese to dispose of a good percentage of their US Treasury holdings at current low yield/high price levels. In effect, it guarantees the Chinese a realized capital gain on their holdings and they should take advantage of the opportunity. Even if the Chinese use the Twist to temporarily convert their long term T-bonds to short term Treasury securities, the Fed will have transformed the inevitable Chinese exit from a potentially confidence rattling outright sale to a position that disappears by quietly coming to maturity and rolling off the books in the months ahead.

The Fed’s Twist is deserving of its name. Most people assume that twisting means changing a form by rotating one end and not the other or the two ends in opposite directions. That fits the Fed’s intended yield curve impact. However, the notion that a policy may be valid for reasons other than its declared purpose suggests the OED’s fourth definition that is to distort or misrepresent the meaning of words. Perhaps this is about avoiding future arm twisting. Or the quintessentially American dance, the twist, might simply be how the Fed intends to waltz China out the door.

Thu, 10/20/2011 - 15:31 | 1794428 chubbar
chubbar's picture

Perhaps it should be renamed to "Operation Titty Twist"? Then there would be no question about the conotation?

Thu, 10/20/2011 - 13:55 | 1793994 RichardENixon
RichardENixon's picture

So we've gone from condo flipping in Nevada and Florida to bond flipping in New York and D.C. I guess the end result of this will be a lot more people working at flipping burgers, assuming anyone will be left who can afford to buy them.

Thu, 10/20/2011 - 14:05 | 1794057 Apocalicious
Apocalicious's picture

Four times more efficient? If you measure efficiency via the interest of the parties on the other side of the trade. I would say efficiency should capture transaction cost to the investor/principal, and if dealers are drooling over the auction it is because they are getting a nice deal from Uncle Ben. Less efficient = higher cost (lower proceeds) to us, sweeter deal (bigger discount) for the B/Ds.

Thu, 10/20/2011 - 14:10 | 1794085 swanpoint
swanpoint's picture

lemme get this straight.. i think i figured it out:



  1. PD's buys shorter term USD and the sells USD to the FED during QEII (presumably at slightly higher than market rates.)
  2. PD's take cash from sale of shorter term USD and buys longer term USD
  3. FED sells the same USD it bought from the PD's back to the PD's during OT (at slightly lower than market rates.)
  4. FED will now buy longer term USD from the PD's (at slightly higher than market rates.)
  5. The next logicaly step would be for the FED to sell longer term USD at below market rates, say, in 2012-13.
  6. Goto Step 1



Thu, 10/20/2011 - 14:16 | 1794126 KandiRaverHipster
KandiRaverHipster's picture

honestly how is this ratio even possible? 

Thu, 10/20/2011 - 15:13 | 1794360 Kreditanstalt
Kreditanstalt's picture

"...flip the
bonds to the open market upon allocation for a tidy profit."

THIS is the problem.  Who in their right mind would buy this stuff today?  Desperate pension funds, mutual funds, insurance and hedge funds I would guess...

Who buys this stuff? 

Thu, 10/20/2011 - 15:41 | 1794471 Amish Hacker
Amish Hacker's picture

The Fed buys the long end of the curve, at a guaranteed profit to the PDs. Who buys the USTs then? "Market participants" (i.e. the unconnected "dumb" money) who have been scared out of equities by a series of engineered bungie jumps in the Dow/S&P, coupled with non-stop talk of deflation in the media. Then 3.20% in the 30-yr looks like a screaming buy, especially if total returns are going to be goosed by further plunges in interest rates. And meanwhile your money will be safe in USTs, right?

Thu, 10/20/2011 - 15:40 | 1794463 bogey4
bogey4's picture

They were notes, not bills.  FYI, a post loses credibility if the poster makes factual errors.

Thu, 10/20/2011 - 21:12 | 1795619 Cat On A Ledge
Cat On A Ledge's picture

23x? Twenty-three times?? i wonder why this article isn't pinned at the top of ZH homepage, cos they just made history.

 One can infer some very interesting facts from this:

1. The bidding parties must be confident that they can unload all those short-term paper in short order, with negligible risk of sudden losses. That also reveals the strength, and depth, of the (negative) undercurrents beneath the apparent calm surface we are seeing right now.

2. Certainly of more interest to ZH'ers, is that with the stunning success of Op Twist, QE3 will not happen anytime soon. Not while the troubles in Europe drag on and on, and China's situation looks increasingly shaky. Expect a continued downward slide for hard commodities such as metals (base and precious).


P.S. Forensics are fun! (and sometimes profitable)

Fri, 10/21/2011 - 02:47 | 1796120 Sherman McCoy
Sherman McCoy's picture

Your credibilty as an expert diminishes greatly when you write things like: "Expect to see yet another spike in PD 1-3 year Bill holdings". For your information, "Bills" as in US Treasury Bills have a maximum maturity of 366 days, and are sold at a discount. Coupon securites have a maturity at issue of no less than 2 years. These issues can be split further into "notes"(2-10 year maturity) and "bonds"(maturity at issue of no less than 20 years). It's clear to me from this post that you've never actually traded Treasuries, or you'd know this.
