One thing that’s become as reliable as clockwork is for stocks to weaken and for Treasuries to firm up right before a big auction. Today is no exception. The reason, such as it is, being given by the media for today’s move is this:
Dec. 8 (Bloomberg) — Stocks, gold and oil fell, Treasuries advanced and the yen and dollar strengthened as credit-rating companies highlighted the risk of government deficits and German industrial production unexpectedly dropped.
Call me suspicious, but I seriously doubt anybody is paying much attention to the ratings companies these days, nor should they, after their uninterrupted string of disastrous performances beginning with Enron and proceeding through the entire subprime debacle. So I don’t think Treasuries firmed up that much on the basis of the mumblings of the credit-ratings companies.
I am not alleging anything here (yet), merely noting another pattern that bears watching, and that pattern is the tendency of Treasuries to strengthen in advance of a big auction.
It’s noteworthy because it seems to run counter to normal market mechanisms, implying that there’s something interesting at work. For example, if we noted that the price of corn went up right before each bumper harvest, we’d sit up and take note of that, too. It’s an interesting dynamic, even if we can’t be sure what’s driving it.
On tap this week for Treasury auctions, besides Monday’s regular weekly auction of new three- and six-month bills, is a $40 billion auction of three-year notes and $29 billion in 4-week notes on Tuesday, $21 billion in 10-year notes on Wednesday, and $13 billion in 30-year bonds on Thursday.
That’s $113 billion of fresh bonds that need to find buyers. Again I will ask, who pays a high rate for bonds in the open market a day or two before a bumper crop? Why not bid low and then buy what you need from the open market if you don’t get everything you desire? The answe0r, I feel, is that there are market participants buying Treasuries for whom “best price” is not the primary consideration.
by endgameplayer