By Gordon Platt
Whodunnit? Mystery buyer mops up US treasuries
The last thing the global financial markets need right now is a failed US treasury bond auction. Thankfully, recent auctions have gone smoothly, with the swelling volumes of US debt continuing to find ready buyers. More and more of those buyers, however, are coming from outside of the close-knit group of primary dealers that trade directly with the Federal Reserve.
A mystery buyer, or buyers, purchased a record 23% of the $40 billion of threeyear treasury notes that were up for bid on January 12. This direct bidder helped greatly to make up for the fact that foreign central banks bought less of the issue than they usually do.
So who was this masked investor who helped to keep interest rates from rising? We may never know, since the Fed and the Treasury do not reveal the identities of the bidders. The lack of information has led to a number of conspiracy theories. Could it be secret buying by China? Is a big investor seeking a safe haven from sovereign risk in southern Europe?
Since the US deficit cannot be fully funded out of domestic savings, the Treasury must rely on foreign buyers or the Fed to make up the shortfall. The Fed has ended its program of buying government debt. Indirect bids, a proxy for foreign central bank buying, are waning. That leaves a catchall category of institutions, non-primary dealers, hedge funds and bond funds.
The uncertainty caused by unidentified direct bidders is unsettling to the primary dealers, who are having a harder time judging the overall demand for securities in order to place informed bids at the auctions. These banks and securities broker-dealers are required to purchase a significant portion of the offerings in order to maintain their status as primary dealers. The Fed needs these dealers to underwrite its record sales of treasury debt and could act to clear up the confusion.