Primary Dealers Play Shrinking Role at Treasury Auctions

The 21 primary dealers required to bid at government-debt auctions are playing a smaller part in the offerings as investors buy more securities directly from the Treasury, according to the Federal Reserve Bank of New York.

Direct bidders are on a pace to take a record amount of the debt sold at auctions this year with awards of $54 billion, or 22 percent of the $247 billion of debt distributed through the competitive bidding process this year, according to data compiled by Bloomberg. That compares with dealers, which have taken 52 percent of the securities, and indirect bidders which have received 26 percent of the debt. Direct bidders won a record 15 percent of the allotments in 2012.

The composition of Treasury holders has remained stable amid the rise in direct bidding as “investors who previously purchased their securities in the secondary market from primary dealers have shifted to the primary market,” Michael Fleming, a vice president in the New York Fed’s Research and Statistics Group, and Sean Myers, a former undergraduate intern at the bank and currently a student at the University of North Carolina at Chapel Hill, wrote in a research note published today.

Dealers bought 56 percent of new Treasury issuance from Sept. 15, 2008, through June 30, 2012, compared with 70 percent from May 5, 2003, through Sept. 14, 2008, according to Fleming and Myers.

‘Guessing Game’

“The primary-dealer community doesn’t really have a clue at this point what the demand is,” said Thomas di Galoma, a managing director at Navigate Advisors, a brokerage for institutional investors in Stamford, Connecticut. “Every auction is a guessing game.”

The increased direct demand may be having an impact on pricing at the offerings. Auction yields were 0.2 basis point lower than in the secondary market from September 2008 through June 2012, according to the researchers. That compares with yields 0.5 basis point higher than in the secondary market for offerings from May 2003 through August 2008, excluding the period from January 2007 through March 2008 for which data was not available.

Dealers have seen their trading volumes decline at the same time their auction allotments have waned. The average trading volume in Treasuries in 2012 was $521.4 billion, down 8.7 percent from a record $571.3 billion in 2011, Fed data show. That compares with average volume of $565.9 billion in 2007.

Trading activity has trailed the growth in the supply of the securities, which reached $11 trillion at the end of 2012, up from $4.5 trillion at the end of 2007, Treasury data show.

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