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Daily Data: Treasury Auction Fail
Did lenders blink?
The Treasury Auction was a disaster! Did Uncle Sam’s lenders blink or was it all just a hack?!
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Treasury Auction Fail
You may have heard that the government borrows a lot of money. Whether and to what extent (and at what cost) it can keep doing that, has been of some interest around these parts.
To summarize for the uninitiated, part of the problem is that the Fed is putting the kibosh on borrowing to fight inflation. It’s doing its darndest to make money scarce and expensive. As it happens, that kibosh applies to Uncle Sam, as well—the Fed is steadily offloading its loans to Uncle Sam, or rather telling Uncle Sam: “sorry, shop’s closed, find another lender.”
There are certainly other lenders out there, but Uncle Sam’s borrowing needs keep going up and up (with no discernable plan to make them go down) and the supply of cash to lend is finite, so at a certain point, one begins to wonder whether (a) will there be enough cash to go around; and/or (b) will lenders start to get cold feet regarding Uncle Sam’s spendthrift ways.
Auction was a “disaster!”
With that context, the Treasury Auction, i.e. when Uncle Sam says “I’m borrowing a bunch of money, who wants to buy my IOUs?!” becomes a big deal.
If all the IOUs get bought easy-peasy, then maybe nothing to worry about (except for everyone else who needs lending, but whatever).
If there’s some hesitancy, then maybe worry.
Last week, the Treasury Auction was a “disaster.”
And while it’s not just ZeroHedge who noticed, I will give ZeroHedge the floor to describe the ways in which demand for Treasuries was bad:
The stacked blue bars on top, reflect the share of issuance that no one wanted (and dealer’s were forced to buy). It was ~25%, which is double their recent average.
Bid-to-cover (i.e. the ratio of bids to accepted bids, which is a proxy for demand) also took a bit of a header.
Finally, the “tail,” which is the difference between what buyers start out charging v. what the end up charging, was ~5.1bps, which is also awfully high.
Liquidity also became very tight:
The spikes are never good news.
It’s a hack!
Now, in fairness, yields have come down a bit since then, and the official story is that a hack of ICBC (the world’s biggest bank) was responsible for a lot of the turmoil.
Apparently, ICBC was forced to send settlement details via a messenger with a USB, which is kind of amazing:
Industrial & Commercial Bank of China Ltd.’s US unit had been hit by a cyberattack, rendering it unable to clear swathes of US Treasury trades after entities responsible for settling the transactions swiftly disconnected from the stricken systems. That forced ICBC to send the required settlement details to those parties by a messenger carrying a thumb drive as the state-owned lender raced to limit the damage.
The workaround — described by market participants — followed the attack by suspected perpetrator Lockbit, a prolific criminal gang with ties to Russia that has also been linked to hits on Boeing Co., ION Trading UK and the UK’s Royal Mail. The strike caused immediate disruption as market-makers, brokerages and banks were forced to reroute trades, with many uncertain when access would resume.
It sounds plausible enough.
The hack also prompted a spike in “non-delivery” of treasuries, i.e. trades that didn’t settle due to non-delivery of the asset.
Random Walk is learning about this stuff on the fly, but apparently non-delivery can happen for a bunch of different reasons (and happens all the time), but certainly a cyber event could cause a spike.
Non-delivery could also happen if there’s a shortage of liquidity (and of course can cause a shortage of liquidity), but there’s nothing to suggest that’s what happened.
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