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Minyan Mailbag: An Angle on Caribbean Treasury Purchases



Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next column with that very intent.

OK, Prof. Succo,

How about the following angle I dreamed up to explain the Caribbean
Treasury Purchases?

For January through March of 2005, the auction yield was about 0.05% higher on average than the opening and closing prices for $IRX. With participation weak from foreign central banks, the auctions weren't going well. A group of Caribbean based hedge funds stepped in to play the difference, buying treasuries in the auctions and selling $IRX or a related derivative with great leverage. Other Caribbean based funds might be using the auction play as part of a larger carry trade or anti-carry trade bet to boost their performance. As a result of these trades, they built up large positions in treasuries that showed up in a big way in the TIC data. Their purchases also showed up as "Indirect Bidders" in the auction results, even though the Fed's data had been showing a big slowdown in the accumulation of official foreign holdings.

Does the above seem feasible to you? If so, then temporary demand for Treasuries might be being created by manipulative action in the bond indexes and bond derivatives markets that pushes down yields there, while leaving them high in the auctions.

I admit that I don't understand much about the workings of the bond markets or how the $IRX is calculated, so I'm guessing about a lot of the mechanics. Any feedback you might have would be greatly appreciated.

The differences in yield disappeared in April, possibly because the Treasury was paying down debt with tax revenues, resulting in limited supply at auction. The differences are back, though, in May.

Minyan Rodg


This certainly could be feasible.

It would be more probable if the buying from the Caribbean was more sporadic, only happening by coincidence with spreads available as you indicate. But the buying by Caribbean accounts is a little too consistent to make this likely.

Another possible source we thought of was Russian capital fleeing their country. Many commodity businesses, both licit and illicit, have made great profits which may be fleeing the country for security purposes as the Putin government throws its weight around.

Monetization is only a probability that I point out. In my mind it is higher than some of my brightest contacts think.

Prof. Succo

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