Why did the T-Notes auction see a sudden rush for 10-year notes?

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T-Notes

Treasury Notes, or T-Notes, are issued for two-year, three-year, five-year, seven-year, and ten-year maturities. Original issue auctions for the ten-year bond are held in February, May, August, and November, with reopenings scheduled in the remaining months. Auctions for the other notes are held monthly. T-Notes pay semi-annual interest and are redeemable at par. Popular ETFs investing in these debt instruments include IEF and SHY.

Part 5

Treasury note auctions

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Reopenings for the three-year and ten-year T-Notes were held this week on Tuesday and Wednesday, respectively. The initial announcement for the three-year and ten-year T-Notes was made on Thursday, March 6. The announcement for the three-year Note mentioned the issue size ($30 billion), auction date (March 11), and settlement date (March 17). The issue will mature on March 15, 2017.

The Treasury yield awarded for the three-year Note auction held on Tuesday, March 11, came in at 0.802%—higher than last month’s rate of 0.715%, with a lower bid-cover ratio (or the total value of bids received divided by the value of securities on offer) of 3.25x, compared to 3.42x recorded for the previous week.

The ten-year Note announcement mentioned the issue size at $21 billion, the auction date as March 12, and settlement date as March 17. The issue will mature on February 15, 2024, as it’s a reopening of the ten-year Note issue auctioned last month. The underlying ten-year T-Note was auctioned in mid-February. The yield awarded for the $24 billion, 2.75% coupon issue, came in at 2.795%—lower than January’s yield of 3.005%. The bid-cover ratio (or the total value of bids received divided by the value of securities on offer) was also lower at 2.54x compared to 2.68x for January’s auction, implying that investor demand for the issue was relatively strong but declining.

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The yield awarded for Wednesday’s reopening of the ten-Year Note was 2.729%—lower than February’s issue at 2.795%. The bid-cover ratio (or the total value of bids received divided by the value of securities on offer), though, was higher, at 2.92x compared to 2.54x, implying that investor demand for the issue was very strong. This view was reinforced by a high proportion of non-dealer bids, which came in at 71%. The bid-to-cover ratio was also the highest of all in 2013 and 2014 year-to-date, at 2.92x, the only exception being March 2013, when it came in at 3.19x.

Why are yields declining?

We can attribute the lower yield recorded in February compared to January to higher demand for safe-haven assets like U.S. Treasuries, which have increased in 2014 due to instability in emerging (EEM) and frontier markets following the onset of the Fed taper in December 2013. Also, investors were spooked by tepid economic data releases in February, which raised questions about the strength of the recovery and resulted in fund flows into low-risk assets like Treasuries. These factors rose prices and lowered yields, impacting fixed income securities like the government-issued TLT and the corporate LQD.

To read about Treasury bond auctions slated for this week, move on to Part 6 of this series.

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