The revelation that a consultant tipped off his clients a half-hour early on the 30-year bond's demise has raised the government's hackles. But that merely puts the feds in the same boat as many traders, who already were angry about the events of Oct. 31.
In a terse statement released Tuesday, the
Securities and Exchange Commission
said that it had "initiated an investigation" into the day's events and that it would "vigorously pursue" the matter. That some people may have gotten a head start on the second-biggest rally in the long bond's history doesn't exactly seem fair, to the government's way of thinking.
But the SEC has its work cut out for it. For one thing, breaking the Treasury's news embargo may not even warrant any penalties, because news embargoes are informal. The consultant in question, Pete Davis, has said that he has attended government media briefings for years.
More troubling is the government's own role in the snafu. The Treasury briefing began at 9 a.m. EDT; the contents were embargoed to the news media until 10, meaning that reporters were free to work on stories as long as they didn't publish before the Treasury made its public announcement. Davis began making his calls after the briefing concluded at around 9:30.
Alas, the Treasury then broke its own embargo, mistakenly posting news of the long bond's demise on its Web site at 9:49 a.m. By 10, the bond had rallied about 1.5%. Obviously, it will be impossible to determine whether traders acting ahead of the official news release were spurred by Davis or by the Treasury site. (Nor should it matter, frankly -- at that point the news was obviously available to everyone, even if everyone didn't know it.)
In any case, some bond market participants have said that the market was rife with rumors of the bond's elimination long before either Davis or the Treasury Web site got into the act. Miller Tabak bond strategist Tony Crescenzi, who is also the head of the Web site Bondtalk.com, says he began getting emails on the subject starting around 9 a.m., when the Treasury's briefing had just started. At 9:40 a.m. he noted on Bondtalk's intraday market page that there were rumors the Treasury would "eliminate issuance of
An even earlier mention of the rumors came from the research firm IDEAglobal, which reported them in a note that went out at around 5 the previous afternoon.
The rumors struck many market players as incredible. Josh Stiles, the senior bond strategist at IDEAglobal, says he was asked by a client that day to investigate the chatter. "I did call some people and asked them if they had heard these rumors," he says. "Nobody in the Treasury or the Fed would talk to me about it. They got angry with me."
Stiles goes on to say that everybody he talked to on the private side considered the idea of the Treasury pulling the 30-year to be bogus -- an opinion he shared. He called the client back and said he didn't give any credence to the rumors. Obviously he wishes that he had.
Whether the rumors were based on any real information -- someone at the Treasury, say, spilling the news after too many mai tais -- is an open question. They could just as easily have come from someone caught in a bad trade, spinning a tale that ended up being true. What is certain is that with all the crosscurrents, it will be almost impossible to prove that anyone who was buying up the long bond ahead of the Treasury announcement was acting on privileged information. The Treasury may well have sent the SEC off on a wild goose chase.
And even if the SEC does finger anyone, the Treasury shouldn't be let off the hook. Bond traders, many of whom got stuck in bad trades when the 30-year got canceled, already are hopping mad about the Treasury's Halloween surprise. It doesn't help that it was executed in such an amateurish fashion.