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The 30-year Treasury bond auction sees superlative demand

Strong activity in Treasuries in the week ended December 12 (Part 3 of 11)

(Continued from Part 2)

Borrowing quantum reduced

The monthly auction for the 30-year Treasury bond, or T-bond, was held on December 11 for $13 billion, lower than in November. Auctions are watched by stock (SPY)(DIA) and bond (BND) investors. Long-term Treasury yields (TLT) reflect economic growth and inflation expectations. They also affect the returns on the real estate sector.

As a result, the returns on real estate investment trusts (or REITS)—such as Annaly Capital Management, Inc. (NLY)—and exchange-traded funds—such as the iShares US Real Estate ETF (IYR)—are closely influenced by 30-year Treasury yields.

Key takeaways

  • The auction size was set at $13 billion compared to $16 billion at November’s auction.

  • The issue’s coupon rate was set at 3%—the same as in November.

  • The high yield for December’s auction was lower—2.848% compared to 3.092% in November.

Bid-to-cover ratio rises on reduced issuance

The bid-to-cover ratio for the auction rose by ~2% to 2.8x month-over-month. This was also higher than the 2014 average of ~2.5x. The rise was due to lower issuance at this month’s auction.

Market demand strengthens

Market demand for the securities rose sharply to 74.1% of the competitive accepted bids—compared to 57.6% at November’s auction. The share of primary dealers plummeted to just 25.9% from 42.5% in November because of high investor demand.

Direct and indirect bidding was stronger. The percentage of indirect bids includes bids from central banks overseas. The percentage of indirect bids rose to 49.8% from 43.8% month-over-month. The share of direct bids includes bids from domestic money managers. The share of direct bids also rose. They came in at 24.3% in December, up from 13.8% in November.

Yields analysis

The high yield awarded at the December auction was lower at 2.848%, down from 3.092% in November. The 30-year Treasury yields moved higher in the secondary market after the auction. Yields rose one basis point from 2.83% to 2.84% on December 11.

Auction analysis

Demand for the T-bond surged as investors hunting for yields purchased long-term US debt. With few alternatives for high-quality bonds, investors had little to choose from. Bond markets are now looking forward to the Federal Open Market Committee’s, or FOMC, interest rate decision. The decision is due on December 17.

Three-year T-bond auction

In the next part of this series, we’ll analyze the key highlights from last week’s Treasury auction for three-year T-notes.

Continue to Part 4

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