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Five-Year Treasury Auction: Finding Balance or Equilibrium in Interest Rates

Jon C. Ogg

The U.S. Treasury has just had its first medium-term note auction for the week in a $35 billion five-year Treasury note auction. This will still pertain to some banks and depository institutions but the rates and duration are low enough that the auction might not get as closely watched as longer-term note and bond auctions. Today's five-year notes will mature on July 31, 2018, and the coupon rate is 1.375%. Unfortunately, the rate went off at 1.41% with some 48.7% allotted at the high.

Some $85.995 billion were tendered out of the $35 billion accepted, giving a bid-to-cover ratio coming in at 2.46 for the five-year note auction. Indirect bids are the foreign demand and this was 53.9% of the competitive auctions accepted. The direct bidders were only 8.3%.

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Today's Treasury auction is not a dud, but it is also not an overwhelming success either. The yield was saved by foreign demand. As a reminder, a 1.41% yield over 5 years represents a total return (minus reinvestment rate) of only 7.05% in total over that five-year period.

The S&P 500 Index is still down 6.91 0 at 1685.50 and the DJIA is down 53.54 points at 15,514.40 after the auction results. The 10-year Treasury note is now yielding 2.594%, and this is indicative that after the sharp rise in interest rates that investors are at least somewhat more willing to buy up these low rates when they rise.

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Our take is that equilibrium on interest rates is being found, for now.

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