“One of the weaknesses in the old-fashioned model was the fact that with five or 10 minutes to go you share information about size and price with somebody else in the market,” Rodosky said. “And from time to time that information would be used to somebody else’s advantage because they would know that people were eager to buy or that nobody was eager to buy.”
Pimco still places most of its auction orders through dealers because they’re better set up than the direct-bidding system to handle bids for funds with multiple accounts and custodians, Rodosky said. If that technical issue could be resolved, Pimco would use the system more, he said.
BlackRock, by contrast, doesn’t bid directly because it wants to reward primary dealers for their research and other trading help, according to Prager.
“While we can go direct, most of the time we don’t,” Prager said. “We feel that the dealers provide us with a lot of services. Our philosophy at this point is, to the extent we can share some of that information with trusted partners who won’t misuse that information, we prefer to reward the primary dealers that provide us all that value.”
The latest version of the direct-bidding system, introduced in 2008, is used by 266 investors, according to data provided by the Treasury. Ninealpha’s Evans said he doesn’t bid directly, in part because “we have a limited number of primary dealers that we interact with and we value the relationships.” Still, most dealers know their biggest clients use the system, he said.
“The primary-dealer community has a pretty good idea that all of the big accounts probably have the lines set up so that they can bid directly,” Evans said.
The Treasury’s borrowing needs have soared since the financial crisis, climbing to a peak of $2.25 trillion in 2010 from $581 billion in 2007. In 2009, the Treasury adopted a schedule of monthly sales of notes with maturities of two, three, five, seven, 10 and 30 years, as well as one auction a month of inflation-protected securities in maturities from five to 30 years. The government also sells short-term bills weekly.
The Treasury will sell three-year notes on April 9, 10-year securities on April 10 and 30-year bonds on April 11. The department hasn’t announced the size of the issues yet.
The record debt sales, combined with the Federal Reserve’s quantitative easing policy of buying Treasury bonds, have boosted interest in the market. There are five more primary dealers today than at the end of June 2009, as U.S. units of Royal Bank of Canada, Nomura Holdings Inc., Societe Generale SA, Bank of Montreal and Bank of Nova Scotia won the New York Fed’s approval. The 21 dealers today compare with 18 when the program started and with a peak of 46 reached in 1988.
The increase in outstanding debt hasn’t translated to the jump in trading some dealers anticipated. An average of $548 billion of Treasuries has traded weekly this year, according to primary-dealer transaction data compiled by the New York Fed. That compares with an average $546 billion weekly in 2006 and 2007, before government borrowing ballooned.
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