Treasuries Dealers Seek Answers After Unexpected Auction Glitch

  • Completion of $28 billion debt sale rescheduled for Friday
  • Rare snags have been caused by systems woes in the past

The Treasury postponed the close of a $28 billion auction of government securities Thursday minutes before the bidding deadline, leaving primary dealers in the $13.2 trillion market searching for answers.

Thursday’s delay was “due to a technical issue,” the department said in a statement shortly before 1 p.m. in Washington. The seven-year note offering has been rescheduled for Friday at 11:30 a.m.

The delay put the 22 primary dealers that are obligated to bid at the auctions in a awkward spot. Traders for these firms generally establish so-called short positions to hedge against losses for Treasuries acquired via the sale, meaning the delay left the participants with unwanted bearish wagers.

"To cancel it with such short notice requires an explanation to the marketplace," said Guy Haselmann, head of capital-markets strategy at Bank of Nova Scotia in New York, a primary dealer.

Treasury spokesman Rob Runyan declined further comment beyond the statement in an e-mailed response to questions.

Treasuries briefly rallied after news of the postponed auction, as dealers made purchases to offset their short positions. Seven-year note yields fell to the days low of 1.43 percent before closing at 1.48 percent in New York, according to Bloomberg Bond Trader prices.

"As soon as the market caught wind of it, the market popped violently,"  said Jim Combias, New York-based head of Treasury trading at Mizuho Securities USA Inc., a primary dealer. "That was the Street covering. People aren’t going to want to sit with that risk."

Auction Interruptions

Auction glitches are infrequent but not unheard of.  The Treasury last postponed the completion of a scheduled auction close in December 2013 when 13- and 26-week bill sales were finalized a day later.

Three sales were delayed after the Sept. 11, 2001 terrorist attacks in New York and Washington and two sales were disrupted in October 2012 by Hurricane Sandy.

In September 2013, a malfunction with the government’s online order system prevented Goldman Sachs Group Inc. from participating in an auction of three-month securities, a person with direct knowledge of the matter said at the time.

Last October, the Treasury delayed a sale of four-week bills for half an hour in order to verify that rules which cap individual bid sizes were followed. That same month, a two-year note auction was postponed due to a congressional standoff over the debt limit.

Thursday’s disruption is another entry on the list. The seven-year auction is the final of three debt offerings this week, after the U.S. sold $26 billion of two-year notes on Feb. 23 and $34 billion of five-year securities Wednesday. 

Competitive and noncompetitive bids that have been submitted "will still stand, but bidders may review and update bids until the auction closes," the Treasury wrote in the rescheduling notice.

"Things could have been significantly worse if all the bids went in," said Thomas Simons, money-market economist at Jefferies Group LLC in New York, a primary dealer. "It must have been something pretty significant in order to want to reschedule the auction about 20 minutes before it was supposed to close."

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