How to Profit From Front-Running the Government Bond Auctions

Tom Dyson writes:
Front-running is illegal.

Here’s how it works: A crooked broker receives a large order from a customer. Before he executes the customer’s order, he’ll buy the stock in his own account. The customer’s order pushes the price of the stock up and gives him an easy profit.

Today, I’m going to show you how to “front-run” the U.S. government. This trade is not illegal. The information we’ll use is public, not “inside” information. But the profits are just as easy… As I showed you in an essay last week, the Treasury sells around $165 billion bonds each month to pay for the government’s spending plans. It auctions these bonds on Tuesdays, Wednesdays, and Thursdays in the second and fourth weeks of the month. In that essay, I showed you how to trade these auctions each month. Today, I’ve got a slightly different twist, which I think will end up being more profitable… 

To make money, all you have to do is front-run the Treasury’s sales of bonds. In other words, you sell short bonds just before the auctions begin on Tuesday, and then cover your short after the last auction on Thursday. Repeat every two weeks. 

Normally, strategies like this don’t work in the financial markets. Traders mark down prices in advance of the auctions, so there’s no benefit to front-runners. But in this case, my guess is, the Treasury’s auctions are so large, they are bludgeoning the market lower, despite the traders’ moves.

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