Why 10-year Treasury notes auction sees lower yields and demand

Must-know: Weekly Treasuries update—impact of FOMC minutes (Part 2 of 8)

(Continued from Part 1)

Auction process for Treasury securities

In this section, we’ll analyze the highlights of the ten-year Treasury notes auction held on July 9, 2014.

The prices and consequent yields of marketable treasury securities—those Treasuries that may be traded on the secondary market—are decided by competitive bids at public auctions held by the U.S. Treasury. Auctions may include first time issues of securities as well as security reopenings. Reopenings are reissues of securities offered previously at the same coupon and maturity date, but with a different purchase price.

The U.S. Treasury holds auctions for ten-year Treasury notes (IEF) each month. Original issue auctions for ten-year notes (TLH) are held in the months of February, May, August, and November, with reopenings scheduled in the remaining months.

The ten-year Treasury notes auction is keenly watched by market participants in both stock and bond markets (AGG) because the ten-year Treasury yield is a benchmark rate for many interest rates including mortgages. 15-year mortgage rates are closely linked to yields on ten-year Treasuries which in turn impacts the housing market (XHB).

Equity markets (VOO) also closely watch this auction because the ten-year Treasury bond yields are used for computing equity risk premiums.

Ten-year Treasury notes auction held on July 9

On July 9, the U.S. Treasury auctioned $21 billion worth of ten-year notes at a coupon of 2.50%—the same as in the June auction. The auction was a reopening of the auction held in May. Consequently, the securities are due to mature in nine years and ten months.

Demand analysis

Demand for this month’s ten-year notes auction was lower, compared to the previous four months. The bid-to-cover ratio for the July auction came in at 2.57x—down from 2.88x recorded in June’s auction. This was also the lowest ratio since February this year. The ratio has averaged 2.71x in 2014.

The bid-to-cover ratio is a measure of demand for the securities on offer. It’s computed as the total value of bids received divided by the value of securities on offer.

Indirect bidders were allotted ~40% of competitive accepted bids—up from ~36% in the June auction. Indirect bids are a measure of overseas demand and the category includes foreign sovereigns and central banks. Although the demand was up from last month, it’s lower than the averages seen in previous months.

The share of direct bids in the auction amount allocated, declined from ~19% to ~14% month-over-month (or MoM). This category includes domestic money managers. It’s a measure of domestic underlying market demand for the securities.

Primary dealers were allotted ~46% of the competitive accepted bids in the auction—up from ~45% last month. This category includes authorized securities dealers and broker firms who act as market makers for the securities.

Yield analysis

The yield awarded at the auction, came in at 2.597%—the lowest since June, 2013. In comparison, the yield awarded at last month’s auction had come in at 2.648%. The ten-year Treasury yields increased by one basis point on July 9 to 2.57%, compared to 2.56% on July 8.

We’ll be analyzing the key takeaways from Treasury auctions held last week in Part 8 of this series.

 

Continue to Part 3

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