Assessing demand fundamentals for the latest T-bond auctions


Oct. 30 2019, Updated 10:40 a.m. ET

What are Treasury bonds?

Treasury Bonds, or T-bonds, are issued for maturities over ten years. Original-issue auctions for the 30-year bond are held in February, May, August, and November, with reopenings scheduled in the remaining months. As we mentioned in the previous part of this series, reopenings are reissues of securities offered previously at the same coupon and maturity date, but with a different purchase price. T-bonds pay semi-annual coupons and are redeemable at par.

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ETFs investing in Treasuries with a maturity exceeding 20 years include the iShares Barclays 20+ Year Treasury Bond Fund (TLT) and the iShares US Treasury Bond ETF (GOVT). The ProShares Short 20+ Year Treasury ETF (TBF) is an inverse bonds ETF. Inverse bond ETFs employ investment strategies designed to negatively correlate to the returns earned on long bond funds. So a hike in long-term Treasury yields would benefit inverse bond funds, while resulting in negative returns for long-bond funds. The reverse is also true.

30-year T-Bonds auctioned on June 12

The 30-year T-Bond auction was a reopening of May’s 30-year bond issue. The underlying 30-year T-Bond was auctioned on May 8 at a coupon of 3.375% to mature on May 15, 2044.

June’s T-Bond auction amount reduced to $13 billion from $16 billion in May. As a result, the bid-to-cover ratio[1. The total value of bids received divided by the value of securities on offer] was higher at 2.69x, compared to 2.09x for May’s auction. June’s bid-to-cover ratio was the highest bid-to-cover ratio recorded since January 2013. High yield rose marginally to 3.44%.

Dealer bids came in at ~26.5% of total accepted competitive bids—almost half May’s ratio of 51.2%. June’s ratio is one of the lowest percentages ever recorded for dealer bids. Dealers act as market makers, taking up any shortfall in demand for the auctioned securities. At present, there are 22 approved dealers, including financial intermediaries, like HSBC Securities and Morgan Stanley (MS). Morgan Stanley (MS) is part of the S&P 500 Index (VOO).

Indirect bids came in at 51.8%—significantly higher than the 40.4% in May. Direct bids were also higher, at 21.8%, compared to 8.4% in May. This would imply that market demand for 30-year bonds was extremely strong. Thirty-year yields on the Treasury yield curve fell by 6 basis points on June 12 to 3.41%.

We’ll discuss the implications of Treasury securities auctions in Part 7 of this series. In the following section, we’ll analyze the key metrics in the weekly auction for Treasury bills. Please read on.


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