Why didn't demand for Treasury notes and bonds rise much? (Part 7 of 8)
Demand for bonds and notes remained subdued
Apart from weekly auctions of T-bills, last week saw auctions for three-year and ten-year Treasury notes and 30-year Treasury bonds.
While Treasury bills saw increased demand for the week, the demand for notes weakened month-on-month, as reflected in the drop in bid-to-cover ratios.
The bid-to-cover ratio for the $30 billion three-year Treasury note auction on April 8 remained stable, at 3.25x, while the ratio for the $21 billion ten-year note auction held on April 9 dropped to 2.72x from 2.92x for the last month. The discount rates for both notes remained stable.
In the aftermath of Fed’s meeting on March 18 and 19, the bond market reacted strongly, as concern for an earlier-than-expected rate hike strengthened. However, the concerns eased after Fed published the minutes of the meeting last week, leading to a correction in bond prices.
As the previous auctions for both three-year and ten-year securities happened before the Fed’s meeting held on March 18 and 19, they didn’t meet with any correction. So the movement in the bid-to-cover ratio for Treasury notes isn’t as dramatic as the movement we saw in the T-bill auctions.
Another possible explanation is that longer-term fixed income securities become less desirable as the economy improves and inflationary pressure grows as people have more money to spend. Central bankers increase interest rates to make the money supply costlier and make consumption less desirable. Longer-term securities are more sensitive to changes in interest rates than short-term securities.
The U.S. Treasury also auctioned $13 billion 30-year 3.625% bonds. The auction saw slightly higher demand, as reflected in the bid-to-cover ratio moving to 2.5x from 2.35x for the auction held in March.
In a rising interest rate environment, Treasury securities and the ETFs investing in them, including the iShares Barclays 1–3 Year Treasury Bond Fund (SHY) and iShares Barclays 7-10 Year Treasury Bond Fund (IEF), become less attractive. However, corporate bonds may not see a proportionate downfall, as the improving economy means better operating performance and, in turn, a contraction in credit spreads. However, investors should exercise caution, as credit spreads are currently at historical lows. Investors can look to investing in ETFs such as the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD). The iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD) invests primarily in investment-grade (rated BBB- or above) corporate bonds, including those issued by Verizon Communications (VZ) and Goldman Sachs (GS).
To learn more about important releases for your fixed income investments ETFs, check out Market Realist’s Fixed Income ETFs page.
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