Why 3-year Treasury notes failed to attract a crowd last week

Market Realist

Why international tensions offset domestic economic growth (Part 4 of 7)

(Continued from Part 3)

Three-year T-Notes

Treasury Notes, or T-Notes, are issued at lengths of two-year, three-year, five-year, seven-year, and ten-year maturities. They’re auctioned once a month, and $30 billion in three-year notes was issued last week, on March 11, 2014. At a coupon rate of 0.75%, the note yielded 0.81%—the highest since September 2010. The bid-cover ratio, an important assessment of investors’ demand, declined for three-year T-notes at a 3.25x bid-cover ratio.

Last week, three-year T-note market yields fell two basis points, to 0.74%, compared to 0.76% the previous week.

The decline in the three-year auction was impacted by data released earlier that same day. The Job Openings and Labor Turnover Survey (JOLTS) data, a measurement of the number of job openings in the U.S., reported better-than-expected results for the week ended March 8, 2014. Increases in the job market are a good sign for the economy and perhaps for the equity market. However, bond markets tend to fall in anticipation of an improved economy leading to a rise in interest rates.

The Redbook index released on the same day is a weekly measure of comparable-store sales at leading retail chains in the U.S. The index reported a sharp decline in same-store sales, indicating less consumer spending. The U.S. equity market (SPY) rallied on the decline, with the SPDR S&P 500 ETF Trust (SPY) down 0.5%, while the Treasury bond market such and the iShares Barclays 20+ Year Treasury Bond (TLT) moved up 0.26%.

Plus, the small business optimism index tumbled 2.7 points, to 91.4 last week. The index compiles a corporate view on ten seasonally adjusted metrics, including companies’ plans on hiring, capital expenditure, business inventories, and expectations of the economy. Last week’s reading suggested pessimism in most of the indicators covered, except that corporations are planning to make more capital expenditures next month.

Relevant trading equivalents: Fund flow outlook

Some of the major ETFs that track government bonds include the iShares 1-3 Year International Treasury Bond (ISHG), the PIMCO 1-3 Year US Treasury Index (TUZ), and the SPDR Barclays Intermediate Term Treasury (ITE).

The iShares 1-3 Year International Treasury Bond (ISHG), with a gross expense ratio of 0.35%, seeks to replicate the performance of Treasury bonds issued in local currencies by developed market countries outside the U.S. with a remaining maturity between one and three years. The ETF tracks the S&P/Citigroup International Treasury Bond Index. Last week, the ETF price was up 1%, while its fund flows declined to $0.11 million. The one-month fund flow was positive, at $0.6 million.

The PIMCO 1-3 Year US Treasury Index (TUZ), with a gross expense ratio of 0.09%, tracks the performance of the Bank of America Merrill Lynch 1-3 US Year Treasury Index. This is an unmanaged index that tracks the performance of the direct sovereign debt of the U.S. Government with a maturity of at least one year and less than three years. Last week, the ETF price was up 0.09%, while its fund flows declined to $0.02 million. The one-month fund flow remained negative, at $0.6 million.

The SPDR Barclays Intermediate Term Treasury (ITE) seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of an index that tracks the one-to-ten-year sector of the U.S. Treasury market. The index reported a fund outflow of $0.95 million last week. The one-month fund flow was positive, at $2.57 million. The ETF price rose 0.37% with a decline in three-year Treasury yields, which ended last week at 0.74%.

Continue to Part 5

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