Why were investors reluctant to bid for 3-year Treasury notes?

Market Realist

Must-know: Why investors favor long-term Treasuries again (Part 2 of 8)

(Continued from Part 1)

Three-year Treasury notes

Treasury notes, or T-notes, are U.S. Treasury securities that have a maturity ranging from two to ten years. Treasury notes or T-notes are issued for two-year, three-year, five-year, seven-year, and ten-year maturities. Original-issue auctions for ten-year notes are held in February, May, August, and November, with reopenings scheduled in the remaining months. Auctions for the other notes are held monthly. Unlike T-Bills, which are issued at a discount and payable at par on maturity, T-notes pay semi-annual interest.

Popular ETFs investing in these debt instruments include the iShares 7–10 Year Treasury Bond ETF (IEF), the SPDR Barclays Intermediate Term Treasury ETF (ITE), and the iShares 3–7 Year Treasury Bond ETF (IEI).

In the week ended June 13, T-note auctions were held for three-year and ten-year maturities, for a total auction amount of $49 billion.

Three-year T-notes auction held on June 10

The U.S. Treasury auctioned $29 billion in three-year T-notes in the week ended June 13. The notes were offered at a 0.875% coupon rate—the same as the rate for the April and May auctions. The yield awarded for the notes came in at 0.93%, slightly higher than May’s 0.928%. Yields for three-year Treasuries, on the Treasury yield curve increased by 5 basis points, from 0.88% on June 9 to 0.93% on June 10.

The bid-to-cover ratio, at 3.41x, was the highest this quarter. This was slightly higher than May’s auction, which came in at 3.40x for an issue size of $29 billion. The ratio for the May and June auctions was helped by a reduced auction size. The original auction size was $30 billion.

Primary dealers accounted for about 54.1% of the competitive bids, up from 47.4% in the May auction. Primary dealers, who basically act as market makers for the auctioned securities and are obligated to bid at auctions, include financial institutions like Goldman Sachs (GS). Investors can gain exposure to these firms by investing in ETFs like the SPDR Financial Select Sector ETF (XLF). It appears that the prospect of an earlier-than-expected rate hike has impacted demand in the last two auctions.

In the next part of this series, we’ll analyze the auction results for ten-year notes. Please read on.

Continue to Part 3

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