Why the demand for 30-year US Treasury bonds was unusually robust
Weekly update: US Treasuries' primary and secondary markets (Part 4 of 8)
Demand for 30-year US Treasury bonds was robust at August 14 auction
The 30-year bond is the longest maturity Treasury security. These 30-year Treasury auctions (TLT) attract a lot of market attention from both stock (QQQ) and bond (AGG) investors. You can gain exposure to 30-year Treasury bonds by investing in the iShares Barclays 20+ Year Treasury Bond ETF (TLT). The PowerShares QQQ ETF (QQQ) tracks the NASDAQ-100. The Core Total U.S. Bond Market ETF (AGG) has holdings in investment-grade corporate and government bonds.
The 30-year mortgage rates are linked to the yields on 30-year Treasury bonds. So, these bonds exert an influence on the housing market (XHB). The State Street SPDR Homebuilders ETF (XHB) tracks the performance of the S&P Homebuilders Select Industry Index. Treasury yields also affect the returns on real estate investment trusts (or REITS) like Annaly (NLY), which employ significant amounts of leverage in its financing structure.
Coupon rate on 30-year Treasury bonds keeps declining
On August 14, the U.S. Treasury auctioned $16 billion in 30-year Treasury bonds at a 3.125% coupon. The coupon rate on the 30-year bonds has been steadily declining since the start of 2014. Geopolitical risks in Russia, Ukraine, Iraq, and Gaza have fueled demand for U.S. Treasuries—considered some of the safest assets in the world. Also, negative first quarter growth and the lackluster pickup in consumption this year forced markets to revise projections for a sooner-than-expected rate hike.
Bid-to-cover ratio second highest in 2014
Demand for the 30-year bonds auctioned in August was slightly ahead with averages seen in 2014. The bid-to-cover ratio for the August auction came in at 2.60x—up from 2.40x recorded in July’s auction. The issuance for the August auction was higher at $16 billion—compared to $13 billion in July. Despite this, the bid-to-cover ratio increased. The ratio has averaged ~2.43x in auctions held in 2014.
The bid-to-cover ratio is a measure of demand for the securities on offer. It’s calculated as the total value of bids received divided by the value of securities on offer.
Market demand spikes
Indirect bidders were allocated ~46% of competitive accepted bids—down from ~53% in the June auction. Although the allotment percentage declined, indirect bidders were given a higher amount of the securities on offer. Indirect bids are a measure of overseas demand. The category includes foreign sovereigns and central banks.
The share of direct bids, including bids from domestic money managers, increased from ~11% to ~24% month-over-month (or MoM). This category gives an indication of domestic underlying market demand for the bonds auctioned.
Primary dealer allotment declines
Primary dealers were allocated ~30% of the competitive accepted bids in the auction—down from ~36% last month. This category includes authorized securities dealers or broker firms who act as market makers for the securities and clean up excess supply. A lower allocation to primary dealers is indicative of higher market demand for the bonds.
Yield analysis
The yield awarded at the auction came in at 3.224%. Similar to the ten-year notes auction, this was the lowest yield awarded since June, 2013. In comparison, the yield awarded at last month’s auction had come in at 3.369%. 30-year Treasury yields decreased by four basis points to 3.20% on August 14—compared to 3.24% on August 13.
Three-year Treasury notes auction
You can read a detailed analysis of the monthly auction for three-year Treasury notes in the next part.
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