Primary dealers are the banks and broker-dealers the New York Fed names as its trading counterparties. There are roughly two dozen of them, including J.P. Morgan, Goldman Sachs, Citigroup and Morgan Stanley. In return for the designation they take on one defining obligation: bid meaningfully at every Treasury auction, whether they want the paper or not. That is what makes them the market's buyers of last resort.
Because the bid is compulsory, you read their award percentage backwards. You want the dealers to end up with very little, because that means real investors absorbed the supply. A big dealer share means demand was thin and the paper got stuffed onto dealer balance sheets instead. That paper does not sit there quietly. Dealers tend to hedge what they are left holding and redistribute it, which weighs on the market for days afterwards. In recent years a healthy coupon auction has left dealers with roughly 10 to 15%. Anything above about 20% on a note or a bond auction is a red flag, and worse still if the auction tailed too.
Say a 30-year bond auction tails 2.9bp. Dealers are awarded 24.6% against a 14.8% average, and indirects slide to 58%. End-user demand failed and the dealers had to backstop the sale. Long-end yields cheapen 5bp, and traders expect more pressure over the following sessions while dealers hedge and work the inventory out.
| DATE | HIGH YIELD | BID-TO-COVER | INDIRECT |
|---|---|---|---|
| 4.834% | 2.71 | 79.2% | |
| 4.683% | 2.53 | 76.7% | |
| 4.580% | 2.59 | 81.5% | |
| 4.538% | 2.57 | 78.2% | |
| 4.468% | 2.40 | 64.0% |
