Mystery Bidders Boosted Demand at Blowout Treasury Note Sale

  • U.S. doesn’t identify category of miscellaneous investors
  • Bond-market strategists see clues to buyers in Fed data

Who were those masked Treasuries buyers?

A mystery came with the Treasury Department’s allotment data for its blockbuster $26 billion two-year auction on May 24 that left primary dealers with the lowest award on record. For just the second time in data going back to 2009, a catch-all category of miscellaneous bidders bought more than $2 billion of two-year debt at auction. Any bid from that segment is relatively rare -- purchasers labeled “other” haven’t bought any two-year debt at all in 41 of the past 80 sales.

The Treasury’s website only offers a list of what the “other” bidders aren’t: central banks, commercial banks, individuals, bond dealers, pensions, insurers, investment funds or foreign buyers. That doesn’t leave many options, and spokesman Rob Runyan declined to comment.

But after a bit of sleuthing, Treasury-market strategists including Credit Agricole’s David Keeble said a couple of groups could be behind the purchases. It may be state and local governments, which owned $632 billion of Treasury securities at the end of the first quarter, according to the Federal Reserve’s flow of funds data, and nonfinancial businesses, which held $95 billion. 

If the mystery buyers came from either of those groups, it may be their cash-management divisions, since pension holdings are reported separately. Cash managers usually stick to Treasury bills, but three-month bills now yield less than the effective overnight federal funds rate. Of course, two-year notes would leave the mystery buyers exposed to higher risk of losses if the Fed raises interest rates.

Loss Risk

“It makes a lot of sense with the baseline assumption being the Fed’s not going -- that’s the only way it makes any sense,” said Aaron Kohli, a fixed-income strategist in New York for BMO Capital Markets, a primary dealer. “If they’re happy with a 76-basis-point yield over the next two years, you could have a mark-to-market loss for a while.”

Two-year notes yielded about 0.76 percent in New York Friday.

That nominal loss would be a worthwhile price to pay for U.S. companies besieged with excess cash, said Tom di Galoma, managing director of government trading and strategy at investment bank Seaport Global Holdings LLC in New York.

Floating-Rate Notes

There’s more evidence to support the idea that the “other” bidders are corporate and state cash managers: That group has also been active at sales of two-year floating-rate notes, buying an average of 9.6 percent since the securities were introduced in January 2014.

Those notes’ interest payments rise and fall based on the discount rates at auctions of 13-week bills. So the securities give cash managers similar exposure without needing to take on expenses related to purchasing new bills every 13 weeks, said Blake Gwinn, a U.S. rates strategist with RBS Securities in Stamford, Connecticut.

“Floaters are the perfect cash-management tool,” Gwinn said. “For people who are really just passively managing cash who would just be rolling a bill over and over, that’s a great spread. You’re avoiding transaction costs.”

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