Must-know US Treasuries update: Why the bull-run continued (Part 2 of 7)
Two-year Treasury notes
Marketable Treasury securities are Treasuries that you can trade on the secondary market. Their prices and consequent yields are decided by competitive bids at public auctions held by the Treasury. 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. Unlike T-bills, which are issued at a discount and payable at par on maturity, T-notes (IEF) pay a semi-annual coupon.
The U.S. Treasury holds auctions for two-year Treasury notes (SHY) each month. The two-year note auction shows you market expectations for movements in short-term rates. In this article, we’ll analyze the key trends at the two-year Treasury notes auction held on June 24.
Yields analysis at the two-year T-notes auction held on June 24
The U.S. Treasury auctioned $30 billion in two-year T-notes in the week ended June 27. The notes were offered at a coupon rate of 0.500%—higher than the 0.375% offered for the May auction. The yield awarded for the notes came in at 0.511%. This was also higher than May’s 0.392%. June’s yield was the highest since May 2011. Yields for two-year Treasuries on the Treasury yield curve increased by 1 basis point, from 0.48% on June 23 to 0.49% on June 24.
There was a sharp slump in the bid-to-cover ratio, which came in at 3.23x compared to the 3.52x clocked in May’s auction. This was the lowest ratio in the second quarter of 2014. A lower issue size of $30 billion, compared to $31 billion, didn’t help generate demand for two-year notes. The bid-to-cover ratio is the total value of bids received divided by the value of securities on offer. The higher the ratio, the higher the demand for the securities on auction.
The percentage of bids allotted to primary dealers declined to about 54% of competitive bids, down from ~56% in the May auction. Indirect bidders, which include foreign central banks, accounted for ~23% of the bids—up from ~18% last month. The percentage of direct bids declined from ~25% to ~23% in the June auction.
Primary dealers basically act as market makers for the auctioned securities and are obligated to bid at auctions. They include financial institutions like JPMorgan (JPM) and Citigroup. You can gain exposure to these institutions by investing in ETFs like the SPDR S&P Bank ETF (KBE) and the State Street SPDR S&P 500 ETF (SPY).
A lower percentage of dealer-accepted bids implies higher market demand, and vice versa. The increase in the percentage of bids allotted to indirect bidders reflects higher overseas demand.
We’ll cover the important takeaways from the week’s two-year note auction, including the increase in yield, in greater detail in Part 7 of this series. In the next part, we’ll analyze the auction results for five-year Treasury notes. Please read on.
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