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U.S. Bond Auction a 'Disaster'
By John M. Berry
Washington Post Staff Writer
Friday, February 11, 2000; Page E01

After rushing last week to buy 30-year U.S. Treasury bonds on the news that the long-term supply of such securities was going to shrink, investors turned up their noses yesterday when the Treasury offered them $10 billion worth of new ones at an auction.

Analysts said prices and yields have fluctuated so violently in the past two weeks that many institutional buyers remained on the sidelines to avoid the risk that goes with such volatility. As a result, Treasury received bids offering to buy only about $13.3 billion worth, the smallest bid relative to the size of an auction at least since 1983--and such bonds have been sold regularly only since 1977. Over the past 17 years, the "bid-to-cover" ratio has averaged 2.23.

The average yield came in at 6.34 percent, far more than the 6.24 percent level for bonds being traded in the when-issued market just before the 1 p.m. auction time.

"The auction was horrible, capping off an ugly [quarterly Treasury] refunding week with what was the worst of a series of bad auctions," said John Canavan of Stone & McCarthy, a financial markets research firm. "The auction qualified as a disaster [and] the bidding was paper-thin."

At the market's close, the price of the benchmark bond had tumbled by $16.25 per $1,000 face value as the yield, which goes up when the price goes down, rose to 6.43 percent, from 6.32 percent at Wednesday's close.

The day was complicated by the fact that Fannie Mae set prices for its upcoming sales of a $3 billion five-year security and a $2.5 billion 30-year issue. That action reminded investors that there was additional supply of long-dated securities waiting in the wings. "The supply pressures, coming after the prior refunding auctions this week, were just too much to take," Canavan said.

On Wednesday, the Treasury's sale of $10 billion in 10-year notes had gone better than yesterday's bond auction, but not by much. The yield on the new issue came in higher than expected and the bid-to-cover ratio was only 1.45, compared with the bond's 1.33, and similarly was the worst in a very long time in that regard. Tuesday's auction of $12 billion in five-year notes wasn't great, it but was much better than the others, analysts said.

At the end of the day yesterday, the Treasury yield curve remained inverted, with yields on both 10-year notes and 30-year bonds lower than those on five-year notes. At the beginning of the year, the curve had a normal upward slope, but since then the Federal Reserve has raised its target for overnight interest rates and most analysts expect at least one more increase is on tap.

The increase, and the anticipation of another one, have pushed up yields in the two- and five-year area more than for 10-year notes, while the yield on bonds has declined.

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-- Farouk Madjurian (fmadjurian@hotmail.com), February 11, 2000

Answers

Farouk ... Can't follow this thread ; i.e. they offer 10 billion, they bid on 13 + billion , and it's " a disaster " ? Something ( someone ) got lost in the translation here . Me ! Thanks for the post . Eagle

-- Hal Walker (e999eagle@FREEWWWEB.COM), February 11, 2000.

You are looking at a bid-to-cover ratio of only 1.33. That is the problem. For the auction to be successful, this ratio needs to be over 2.0.

Bid-To-Cover-Ratio is the number of bids received in a Treasury security auction compared to the number of bids accepted. A high ratio (over 2.0) is an indication that bidding was aggressive and the auction successful. A low ratio, indicating the government had difficulty selling its securities, is usually accompanied by a long TAIL, a wide spread between the average and high yield (the average and lowest accepted bid). (From: Dictionary of Finance and Investment Terms - John W. Downs and Jordan Elliot Goodman)

-- Farouk Madjurian (fmadjurian@hotmail.com), February 11, 2000.

Farouk ... thanks for the follow-up . Got it straight now . Eagle

-- Hal Walker (e999eagle@FREEWWWEB.COM), February 11, 2000.