Demise of the Dollar

[analogdog]

Forget Greece, the US Almost Had a Failed Treasury Auction

While most of the investment world focuses on the
various ”senior officials” (none of whom seem to have
actual names or positions) commenting on whether
Greece will or will not be bailed out/ receive an
emergency loan/ offered moral support, etc, a far more
significant debt story is emerging in the US.

On Wednesday the US offered $16 billion worth of 30-year
Treasuries (US debt that will mature in 30 years). Before
we get into the details of how much of a disaster the auction
was we’re going to do a brief review of how US debt issuances
work.

US Debt is issued by the US Treasury. You can bid as much
as 30 days in advance of a debt auction. When the auction
actually takes place investors can buy directly (Direct Buyers)
by buying Treasuries themselves OR they can buy indirectly
(Indirect Buyers) by using a Primary Dealer: one of 18 Banks
and Securities Brokers who do business directly with the
US Federal Reserve Bank of NY and so HAVE to buy
Treasuries at auctions to insure liquidity.

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Are You Ready for the Sovereign Default
Crisis?

The markets initially collapsed when Greece
almost defaulted on its debt.

But the Greek economy is only $354 billion
roughly that of the state of Massachusetts.

Imagine what will happen when Spain,
Ireland, Italy, Portugal, the UK and possibly
even the US default?

The US almost had a FAILED Treasury
auction just this week. And we've got
TRILLIONS in new debt issuance on deck
just for 2010.

Direct buyers buy “off the radar” meaning you
cannot track who the buyer is.

If an investor buys indirectly, he or she has to
notify the Primary Dealer of his/her intentions in
advance. This might sound a bit like showing your
hand while playing poker. And it is. The only
reason to go through a Primary Dealer (make an
Indirect Purchase) is because you want to buy a
sizable load of Treasuries (remember, Primary
Dealers have a special relationship with the Fed
and so can insure you get the amount you require).

Historically, Foreign Governments (China, Japan, etc)
have made up the majority of Treasury purchases.
Because of this, the Indirect Buyer purchases are
typically thought to represent just how demand
Foreign Governments have for US debt.