SALOMON-BROTHERS AND THE MAY 1991 TREASURY AUCTION - ANALYSIS OF A MARKET CORNER

In May 1991, the Treasury sold $12.29 billion in two-year notes. Throu gh improper bidding, Salomon Brothers gained control of at least 86 pe rcent of the issue. This study investigates the impact of Salomon's at tempted corner by examining the postauction price behaviour of the two -year note. Based on a no-arbitrage relation, the results show that th e two-year note was substantially overpriced for approximately six wee ks following the auction. The typical mispricing during this period is estimated at 0.16 to 0.25 percent of par. In dollar terms, the aggreg ate misvaluation averaged $20-$30 million, and, by controlling the sup ply of the issue, Salomon stood to gain substantially from the squeeze .