Bond Auctions

Discussion in 'Financial Futures' started by j.futures, May 10, 2007.

  1. j.futures


    Hello all

    I'm a novice treasury bond trader and I could really do with your help:

    I have a particular question regarding treasury bond auctions which has puzzled me for quite some time. Do treasury bond auctions have any particular influence on short, medium or long term price movements in the 10 and/or 30 year treasury bond futures?

  2. They could.

    It all depends on how the dealer community views the new auction. Let's say UST was going to issue 10B 10Y notes and they are priced at a yield of 4.650 (assume the current 10Y on the run is trading at 4.645%)

    that small difference in yield for yield seeking leveraged players could mean money. But, does it mean that particular NI (new issue) has "value"? Arguably, depending on the circumstances, No. Then, if the majority of US participants view it as no value, you see somewhat of an adverse reaction in the auction (usually indirects [ Japan, China, UK ] step up and buy because they're using it for other uses (currency intervention, etc..)

    Now, a phenomenon that was used by LTCM and highlighted in a couple research papers I was reading at lunch here in nyc the other day:

    The WI (when issued, new issue, take your pick) would price higher in BP (let's say 20 basis points higher) than the on-the-run current.

    What LTCM would do, was short the WI right out of auction and go long the issue that is now considered old-current. The previous old-current is now the old-old-current.

    EDIT: They bet that the yields would converge after the auction... It worked well until the russian default, and hasn't really worked too well after that...

    Herein lies the rub for that strategy. Repo rates. When you short a bond you have to buy it from a dealer, typically at a overnight repo rate. Sometimes, due to supply and demand, that repo rate could fluctuate wildly.

    LTCM assumed that repo rates would not "go too wild" and they were able to borrow the bond to short, and take advantage of near "riskless" repo rate pricing. When that got out of hand, the rest is history..

    Sorry if it's longwinded, but auctions can be used still to determine the overall supply and demand for that particular issue (10, 30, etc..)
  3. "Longwinded"? Ha! This is probably the most useful post on ET this week.
  4. Surdo


    Nice Post CBK!
  5. j.futures


    Thank you very much ChiBondKing.

    I will go through this information carefully over the weekend. You've definitely given me a number of useful leads to research.

    Much appreciated.
  6. check out this link:

    this is the paper i was reading...

    also, the trader doesn't "buy" the security from the dealer.. he borrows it at the ON repo rate, and has to enter into a reverse-repo agreement... The author does a pretty good job of explaining the process and the problem of this strategy now in the paper... Ignore him when he goes all mathematical [unless that's your forte].. The ideas are in the paper.
  7. j.futures


    Thank you Bernard111

    Much appreciated