The inaccessibility of the cheapest-to-deliver bond caused the price of the June futures contract to rise, because the market expected more-expensive bonds to be delivered. This created an unusual opportunity for anyone who was holding the cheapest-to-deliver bond to make money by selling them at the higher futures price.
If any investor who owned the bonds withheld them with the specific intent of manipulating the futures market, that could be illegal under rules of the Commodity Futures Trading Commission, the federal regulator for the futures market. But that is a high legal standard that has proved difficult for the CFTC to meet in previous cases. A CFTC representative declined to say whether the commission was investigating the matter.
June 29, in an effort to avoid a repeat of what occurred in June, the CBOT issued a new rule saying no single entity could demand delivery of bonds on more than a limited number of contracts -- 50,000 in the case of the 10-year Treasury note. The new rule doesn't take effect until December, but it caused the price of the September futures contract to fall, because it cut the demand for bonds that could be delivered. That caught many futures players by surprise and led to big losses on the September contract.
"It caused major pain to Wall Street and to hedge funds," says Chas Mancuso, a futures broker at Fimat USA LLC, a unit of French bank Société Générale SA. He estimates the losses might have reached $500 million. The Futures Industry Association, a trade group, issued a letter to the CBOT severely criticizing the rule change.
Treasurys
Treasurys ended slightly lower after a disappointing $13 billion sale of five-year notes spurred fear that foreign investors are losing interest in U.S. government securities.
The bid-to-cover ratio, a general measure of demand, stood at 2.92, up from the 2.46 average of the past 10 auctions of five-year notes. But indirect bids -- those from foreign official accounts and others that don't bid directly through the Treasury -- represented only 22% of the $12.8 billion in total competitive bids accepted. That was well below the 30% in July's five-year sale and the 39% average in such auctions in the first seven months of the year.
Monday, a Treasury three-year note sale also saw much lower indirect participation than dealers had hoped. Pending release of government-auction data next month, it won't be clear how much less foreign institutions bought. Still, the latest auction results "give us the sense that foreigners are taking a pause," said Ralph Axel, fixed-income strategist at HSBC in New York.
At 4 p.m., the benchmark 10-year note was down 2/32 point, or 62.5 cents per $1,000 face value, at 97 27/32. Its yield rose to 4.398% from 4.392% Tuesday, as yields move inversely to prices. The 30-year bond also was down 2/32 point, at 111 29/32 to yield 4.580%, up from 4.576%.
http://online.wsj.com/article/0,,SB112368580566209811,00.html?mod=home_whats_news_us
If any investor who owned the bonds withheld them with the specific intent of manipulating the futures market, that could be illegal under rules of the Commodity Futures Trading Commission, the federal regulator for the futures market. But that is a high legal standard that has proved difficult for the CFTC to meet in previous cases. A CFTC representative declined to say whether the commission was investigating the matter.
June 29, in an effort to avoid a repeat of what occurred in June, the CBOT issued a new rule saying no single entity could demand delivery of bonds on more than a limited number of contracts -- 50,000 in the case of the 10-year Treasury note. The new rule doesn't take effect until December, but it caused the price of the September futures contract to fall, because it cut the demand for bonds that could be delivered. That caught many futures players by surprise and led to big losses on the September contract.
"It caused major pain to Wall Street and to hedge funds," says Chas Mancuso, a futures broker at Fimat USA LLC, a unit of French bank Société Générale SA. He estimates the losses might have reached $500 million. The Futures Industry Association, a trade group, issued a letter to the CBOT severely criticizing the rule change.
Treasurys
Treasurys ended slightly lower after a disappointing $13 billion sale of five-year notes spurred fear that foreign investors are losing interest in U.S. government securities.
The bid-to-cover ratio, a general measure of demand, stood at 2.92, up from the 2.46 average of the past 10 auctions of five-year notes. But indirect bids -- those from foreign official accounts and others that don't bid directly through the Treasury -- represented only 22% of the $12.8 billion in total competitive bids accepted. That was well below the 30% in July's five-year sale and the 39% average in such auctions in the first seven months of the year.
Monday, a Treasury three-year note sale also saw much lower indirect participation than dealers had hoped. Pending release of government-auction data next month, it won't be clear how much less foreign institutions bought. Still, the latest auction results "give us the sense that foreigners are taking a pause," said Ralph Axel, fixed-income strategist at HSBC in New York.
At 4 p.m., the benchmark 10-year note was down 2/32 point, or 62.5 cents per $1,000 face value, at 97 27/32. Its yield rose to 4.398% from 4.392% Tuesday, as yields move inversely to prices. The 30-year bond also was down 2/32 point, at 111 29/32 to yield 4.580%, up from 4.576%.
http://online.wsj.com/article/0,,SB112368580566209811,00.html?mod=home_whats_news_us