Were bond prices too high at the 10-year Treasury notes auction?



Ten-year Treasury notes

The prices and consequent yields of marketable Treasury securities (Treasuries that may traded on the secondary market) are decided by competitive bids at public auctions held by the Treasury. Auctions may include first-time issues of securities as well as security reopenings. Reopenings are re-issues of securities offered previously at the same coupon and maturity date, but with a different purchase price.

Part 3

Ten-year T-notes auctioned on June 11

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The ten-year T-note auction was a reopening of the ten-year note issue auctioned last month. The underlying ten-year T-note was auctioned on May 7. The June 11 issue had an auction amount of $21 billion and coupon of 2.50%. The high yield came in at 2.648%—higher than May’s yield of 2.612%. The bid-to-cover ratio[1. The total value of bids received divided by the value of securities on offer] was higher, though, at 2.88x compared to 2.63x for May’s auction. June’s ratio was also the highest bid-to-cover ratio recorded in the quarter.

Dealer bids came in at 44.5% of total accepted competitive bids—higher than May’s 29.1%. Indirect bids came in at 36.1%—significantly lower than the 49.2% in May. Direct bids were also lower at 19.4%, compared to 21.6% in May. The percentage of direct and indirect bids are actually assessments of the underlying market demand for Treasury securities, as the primary function of dealers is to act as market makers and make up for any shortfall in demand.

A higher percentage of dealer-accepted bids implies lower market demand. Lower market demand is probably because investors believe the economy is gaining traction. Normally, bond yields rise as a result of an improving economy, which lowers bond prices. If investors believe yields on bonds are too low and bond prices are too high, they’ll refrain from bidding.

Primary dealers include financial institutions like JP Morgan (JPM) and Barclays Capital. JP Morgan (JPM) is part of the S&P 500 Index (SPY), which includes the 500 largest publicly listed companies by market capitalization. ETFs investing in ten-year notes include the iShares 7–10 Year Treasury Bond ETF (IEF), the SPDR Barclays Intermediate Term Treasury ETF (ITE), and the iShares 10–20 Year Treasury Bond (TLH).

In the next part of this series, we’ll discuss the auction for the 30-year Treasury bond held on June 12. Please read on.


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