The government's decision to halt sales of the 30-year bond surprised investors, because the announcement followed speculation that a shrinking budget surplus would lead the government to delay a plan to eliminate the securities.
Any trader who had advance knowledge of the step would have had an advantage on a day when bonds posted their biggest move since the October 1987 stock market crash. The 5 3/8 percent Treasury bond maturing in 2031 gained 5 5/32 points, pushing down its yield 33 basis points to 4.87 percent.
Government blunder
"Did the Treasury make a mistake? Apparently it did," said James Keller, a portfolio manager at Pacific Investment Management Co in Newport Beach, California, which has US$240 billion under management.
Daily trading in the Treasury market dwarfs the stock market, with more than US$300 billion of average daily trades last week, compared with about US$75 billion for the New York Stock Exchange and NASDAQ Stock Market.
"It would be extremely troubling to market participants that information of a market-moving nature was prematurely and unevenly released," said Micah Green, president of the Bond Market Association, which represents bond dealers.
Davis worked 11 years on Capitol Hill as an economist with the Joint Committee on Taxation, the Senate Budget Committee, and for Democratic Senator Robert Byrd. In the private sector, he has worked for Prudential Bache Securities Inc. and Ernst & Young, establishing his own firm in 1992 to advise institutional investors on government policy.
"My 11 years on Capitol Hill and 16 years advising Wall Street clients have taught me how to get Washington information ahead of the media," Davis said on his Web site.
Many federal agencies, including the Treasury, often brief reporters under embargo in order to provide for an orderly release of information. Other departments, including Commerce, Labor, and Agriculture provide information to reporters in a locked room with no telephone access ahead of release time, which prevents any early disclosure.
"This guy cheated big time," said John Poole, who manages US$10 billion in bonds at Mellon Private Asset Management in Boston.
"It's too bad, especially for the ones who were short on 30-year Treasuries," he said. "But it's not the first time strange or illegal things happen with the bond markets."
The Treasury itself leaked its own announcement by inadvertently posting a statement on its Web site around 9:50am.
The department's Office of Public Affairs issued a statement Wednesday evening confirming what it called an "inadvertent" leak. "Treasury regrets this occurred and will work to ensure the integrity of the announcement process," the statement said.
"The Treasury needs to be a little bit more protective about how everything is released," said Pimco's Keller, a member of the Treasury's Borrowing Advisory Committee, which advises the department on how best to manage the government's debt.
Groskaufmanis said Treasury's premature release of the information on its Web site might be an argument in defense of insider trading charges.
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