Only $34 billion in bids were submitted at today's auction for $50 billion of the Fed's Treasury holdings, a cover ratio of 0.68. This means that dealers basically said to the Fed, "We don't need to swap our mortgage-backed securities, agencies and the like for your Treasuries." In essence, it means that dealers have no immediate liquidity need, a very positive development, for today at least.
Importantly, today's auction was for "Schedule-2" collateral, which is the relatively lower-quality paper. The Fed has alternated its weekly auctions of collateral (each Thursday for the past four Thursdays) between Schedule-1 collateral (agency debt and agency MBS) and Schedule-2 collateral, meaning that dealers every two weeks have an opportunity to exchange collateral deemed relatively less liquid for the Fed's Treasuries. That dealers didn't should be seen as good news.
The only issue remaining in this analysis is whether dealers over the past week tapped the Fed's Primary Dealer Credit Facility (PDCF). If they did, it would help explain why dealers did not seek much help from the Fed today at the Term Securities Lending Facility (TSLF). The likelihood is that dealers did not borrow much from the PDCF.
Tony Crescenzi is the chief bond market strategist at Miller Tabak + Co., LLC, and advises many of the nation's top institutional investors on issues related to the bond market, the economy and other macro-related issues. At the request of the Federal Reserve, Crescenzi is a regular participant in the board's Livingston Survey of economic forecasters. He is also the author of the revised investment classic, The Money Market,
first published in 1978 by Marcia Stigum, and The Strategic Bond Investor. At the time of publication, Crescenzi or Miller Tabak had no positions in the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Crescenzi also is the founder of Bondtalk.com, a popular Web site covering the bond market and the economy. Crescenzi appreciates your feedback; click here to send him an email.
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