Unreasonable Expectations For Today’s Auction Results?

Good Morning,

At One PM the results of the 10-year note auction will be announced. I have not spoken with anyone who participated in the auction. I am assuming it went something like that scene from margin call when their sales team is asked to sell their clients junk.

https://www.youtube.com/watch?v=RR4_mLmR1FE

I am assuming with 32 primary dealers being forced to participate, the sales team did their job, and they were able to unload, most of the issuance. The market is pricing in the next ten-year issuance at a lower coupon rate than the 1.625 that they could not unload during the initial auction. The IRR of a new issuance on auction date for a ten year with a 1.625 coupon is going to be around 0.01625, which is what I expect the yield for the Ten year to be on the next auction date.

It will be interesting to see how it plays out intraday. The quandary that some conspiracy theorists claim the Fed is facing, is that they have a vested interest in keeping yield’s low so they can unload their corporate bond portfolio at a premium. However to do this, they must:

1. Unload the rest of the 91282CCB5 at a premium when the yield on it at par is barely enough to cover expected CPI increases.

2. Auction of a new issuance at a lower coupon rate to dealers who have clients that hate money and math.

3. Unload their corporate bond portfolio.

4. Allow interest rates to rise quickly to try and curb damage done by inflation.

I am interested in how the Fed was able to sell off 38 billion of a bond with a 1.625 at a premium. They must have the slickest sales team the block. Hopefully, they threw in some corporates at a discount to their loyal customers as an apology considering the expected CPI increases vs such a low coupon rate.

For those of you looking to play the volatility of the convexity and duration equations on corporates over the next year, as the equity markets look to be so overpriced. I would highly recommend going with the best professionals in the business to protect your assets. Some retail banks have great customer service teams with great products, and work with great Investment Manager’s to protect their clients’ assets. Some do not.

There are few Investment Managers that have constantly outperformed in this arena for decades. Its typically not a fair fight for “retail” investors to go up against professionals in this area. The BlackRocks, JPAMs, EVs, Loomises, Wellingtons, ETC, have great teams of smart people, they do their homework, and their services are well worth their fees.

Other Banks should follow suit, the industry is long past the days when satisfactory performance was ensuring that it is no longer possible to press two for Spanish and open a bank account without a Social Security Number.

Warmest Regards,