NEW YORK, June 24 (Reuters) - Recent changes to the way the U.S. Treasury tallies demand at its bond auctions may be artificially inflating “indirect bids,” a category used by investors as a loose proxy for foreign demand.
Foreign investors own more than a quarter of the Treasury market, making their continued interest in U.S. bonds of paramount importance to the market.
At the very least, the Treasury’s shift, made earlier this month, is confusing traders, prompting some to second-guess the apparent strong interest in recent auctions.
Indirect bids have been unusually strong of late, reaching a record 68 percent at Tuesday’s two-year note sale, and exceeding 62 percent at Wednesday’s sales of $37 billion in five-year notes.
“We’re not going to make much of that, given the information we’ve gotten on the rule changes,” said John Spinello, fixed-income strategist at Jefferies, a primary dealer. “The indirect bids are now going to be higher given the change in procedures.”
Indirect bids are defined as ones that do not go through primary dealers, large banks that do business directly with the Fed and are required to actively take part in Treasury auctions.
Top officials in China and Russia have expressed unease about the growing U.S. budget deficit, slated for a record $1.75 trillion in fiscal 2009 alone. This means that traders pay extra close attention to foreign demand figures.
The Treasury’s changes, contained in a June 1 entry to the Federal Register, relate to what it considers a “guaranteed bid.” Under the previous arrangement, once a primary dealer offered securities at a pre-specified level to its customer, that bid was considered to be the dealer’s own.
The matter was technical enough to confuse even industry veterans.
“We are not precisely sure what this all means,” said Ward McCarthy, managing director at Stone & McCarthy Research Associates in Princeton, New Jersey.
“We spoke with some very seasoned market players with decades of experience on dealer trading floors who were similarly unsure what to make of the contents of the Federal Register.”
The Federal Register entry can be found here
The Treasury was not immediately available for comment. (Additional reporting by Ellen Freilich and Kristina Cooke; Editing by Kenneth Barry)