The Cost of Liquidity? $250,000,000

There was a surprise today in the treasury market, with multiple issues reopened and more treasuries sold into said issues. But it was done in a huge hurry, with the market given something like an hour’s notice, as if someone at the Fed was double-parked outside.

Anyway, getting $10-billion in liquidity was a costly bit of business, with the yield coming in 40 basis points cheap to the prevailing levels in the market. That lead John Janson to the following conclusion about how costly it was:

In bond market jargon that 40 basis points is known as a “tail” or the number of basis points from where the issue was to the level at which it stopped. Most auctions come “on the screws” which is more jargon for the notion that they come essentially where they are trading at auction times. A typical “sloppy” auction might “tail” 2 basis points. There are 5 basis point tails and I can recall 10 basis points and even 15 basis point tails. They are rare. Extremely. In all my years I can not recall a 40 basis point tail and shall proclaim this the record holder.

Now to place that in dollars and sense terms for the taxpayers of the USA I offer this. On that bond every basis point is worth a little more than $600 per million bonds. Multiply by 40 basis points and you get $24,000 per million. The auction size of $10 billion equates to 10000 million. Multiply by 24,000 and the product is $240,000,000.


More here.