Overall Demand Rises at 3-year Treasury Note Auction Held May 12
Latest Demand for Treasury Notes Strong, Less So for Bonds
Borrowing amount maintained
The US Treasury holds monthly auctions for the three-year Treasury notes. Yield on three-year Treasury notes is related to movements in the federal funds rate. As a result, these auctions attract a lot of attention from stock and bond (BND) (AGG) market participants.
Exchange-traded funds such as the iShares 1-3 Years Treasury Bond Fund (SHY) have holdings in three-year Treasury notes.
The borrowing quantum at the May auction was the same as April’s $24 billion.
Key takeaways
The auction was held on May 12.
The auction size was set at $24 billion—the same as in April.
The issue’s coupon rate was set at 1%—25 basis points higher than at the April auction.
The high yield for May’s auction was higher at 1% when compared to 0.865% in April.
Demand analysis
The bid-to-cover ratio is an important demand indicator. It’s the total value of bids received divided by the value of securities on offer. A higher ratio implies higher demand and vice versa. Demand for three-year Treasury notes rose in May for the first time in three months. The bid-to-cover ratio rose by 2.8% month-over-month to 3.34x at May’s auction. In the year to date, the ratio has averaged 3.31x, the same as the average from the auctions held in 2014.
Market demand at the auction was higher month-over-month. It came in at 64.3% of the competitive bids compared to 60.5% in April. Indirect bidders accounted for 52.7% of the accepted competitive bids. This was up from 49.4% in April. Indirect bids include foreign central banks.
Meanwhile, the percentage of direct bids rose marginally month-over-month to 11.6%, up from 11.1%. Direct bidders include money managers such as Wells Fargo (WFC) and Invesco (IVZ).
Due to the rise in market demand, primary dealer allotments were lower at 35.7% of the competitive accepted bids from 39.5% a month ago. Primary dealers include companies such as JPMorgan Chase (JPM).
Yield analysis
Like the ten-year-note auction, the auction of three-year Treasury notes was a strong one. Yield on three-year Treasury notes moved lower in the secondary market after the auction. It ended May 12 at 1% compared to 1.02% May 11.
Next in this series, we’ll look at primary market activity for Treasury bills.
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