Why the 7-year Treasury note auction shrugged off rising rates

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Seven-year Treasury notes

Seven-year Treasury notes are announced monthly, usually in the third week of the month (on Thursday), and then auctioned the following week. The notes are issued (settled) on the last day of the month. Last week (March 27), the U.S. Treasury Department auctioned seven-year notes to raise $29 billion.

The bid-to-cover ratio, at 2.59x, declined from to the previous month’s 2.72x. A high bid-to-cover ratio indicates increased investor demand, while the opposite holds true for a lower ratio.

High yield, at 2.25%, was nearly 1 basis point below the bid at the auction deadline, indicating tight bidding. Tight pricing indicates higher investor demand for issuance, while low pricing indicates investors’ reluctance to accept the deal terms.

Last week (March 28), the seven-year Treasury market yield rose 0.04%—at 2.32% from the previous week’s yield of 2.28%.

The rise in Treasury yields, and last week’s warning from Fed Chair Janet Yellen that rate hikes could begin sooner than expected, didn’t impact demand for the seven-year Treasury notes much, as 74% non-dealer participation in the auction pointed to strong demand from buy-and-hold accounts.

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Some of the major ETFs that track the U.S. intermediate and long-term Treasury market include the PIMCO 3-7 Year U.S. Treasury Index Exchange-Traded Fund (FIVZ), iShares 7-10 Year Treasury Bond ETF (IEF), ProShares Short 7-10 Year ETF (TBX), Direxion Daily 7-10 Year Treasury Bear 3X Shares ETF (TYO), and iShares 20+ Year Treasury Bond (TLT).

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