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Why demand for 3-year Treasury notes declines

Phalguni Soni

Must-know: Weekly Treasuries update—impact of FOMC minutes (Part 4 of 8)

(Continued from Part 3)

Treasury note auctions in the week ended July 11

In the week ending July 11, Treasury note (or T-Note) auctions were held for the three-year and ten-year maturities for a total auction amount of $48 billion.

Three-year T-notes auction held on July 8

The three-year Treasury notes auction is held each month. The U.S. Treasury held the auction for three-year Treasury notes on July 8, putting $27 billion worth of securities on offer. The amount on offer was down from last month’s $29 billion.

Demand analysis

Despite the lower issuance, the bid-to-cover ratio came in lower at 3.38x, compared to 3.41x in the June auction. The ratio has averaged 3.35x this year. The bid-to-cover ratio is a measure of demand for the securities on offer. It’s computed as the total value of bids received divided by the value of securities on offer.

There was an increase in bids from overseas investors. The percentage of bids allotted to indirect bidders increased from ~26% to ~38% month-over-month (or MoM). The indirect dealer category includes foreign sovereigns and central banks.

In comparison, direct bids declined from ~19% to ~13%. Direct bidders are a category that includes domestic money managers. A decline in the percentage of direct bids is a sign of lower underlying domestic market demand.

Primary dealers accounted for ~49% of bids—down from ~54% in the June auction. Primary dealers are authorized securities dealers and broker firms who act as market makers, clearing excess supply at the auctions. These include firms such as JPMorgan Securities LLC and Citigroup Global Markets.

JPMorgan and Citigroup are financial intermediaries that are part of the S&P 500 Index (IVV) and the SPDR S&P Bank ETF (KBE).

Yields analysis

The coupon rate on the three-year notes was unchanged from last month at 0.875%. The yield awarded for the notes came in at 0.992%—higher than the 0.93% at June’s auction. This was also the highest yield awarded since May, 2011 (Source:Bloomberg).

On the Treasury yield curve, yields for three-year Treasuries decreased by one basis point, to 0.99% on July 8, compared to 1% on July 7.

A more detailed analysis of the key takeaways from last week’s Treasury auctions is provided in Part 8 of this series.

What are Treasury notes?

Treasury notes (or T-Notes) are U.S. Treasury securities that have a maturity ranging from two to ten years. 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 the months of February, May, August, and November, with reopenings scheduled in the remaining months. Auctions for the other notes are held monthly. Unlike Treasury bills (or T-Bills) which are issued at a discount and payable at par on maturity, T-Notes pay semi-annual interest.

Popular exchange-traded funds (or ETFs) investing in Treasury notes 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).

26-week T-bill auction held on July 7

In the next section, we’ll analyze the key takeaways from last week’s 26-week Treasury auction. Please continue reading the next section in this series.

Continue to Part 5

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