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Well-known member
Sep 5, 2007
Very interesting piece from FTAlphaville examining the exact process by which T-Bills and Irish ones in particular are auctioned. And could go some way to explain why we are getting a good cover at the auctions yield still paying nearly as much for 6m bill as Germnay does for 10 year bonds.

FT Alphaville » A loser’s nightmare in Europe’s debt auctions?

Did anyone else puzzle over the results of Ireland’s T-bill auction on Thursday?

The sale, after all, failed to secure the maximum amount sought, despite being extremely well covered:

Well, Irish T-bill auctions — launched in March 2009 — followed a competitive discriminatory process, with a non-competitive follow up.

The results for Thursday’s two auctions show that the NTMA allocated about 75 per cent of the intended issue, with the results of the non-competitive option still to be confirmed.

As we noted, it’s a puzzling situation since there was such a high bid-to-cover, especially in the April 2011 issue of 11.7.

In contrast, when the DMO has used its option to reject low bids and to allocate only a portion of its intended issue, it has done so only when auctions went uncovered. Which makes sense.

For the NTMA to reject a portion of the offer, despite having an extremely healthy bid-to-cover alongside a much higher average yield, implies a peak distribution of bids that was probably far below the best price offered.

Hence, a ‘loser’s nightmare’ even for those who valued the securities within the peak distribution. Odd.

So what forces are at play? Presumably, we would say, two very different types — a fact which may, or may not, be leading to quite a broad dispersion of bids.

After all, there’s the bulk of the market which believes the securities should be valued at a much lower price than the average allotment, and a handful of players who are happily suffering a winner’s curse scenario in order to see the bonds purchased– irrespective of the amount they may be paying over the market.

And in a two-tiered market like that, one might presume that could mean there’s information asymmetry somewhere.

So, given the above, is it any wonder that secondary market trading of Irish bonds has becoming so volatile?

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