Why did demand for 5-year Treasury notes spike?



Five-year T-notes

The U.S. Treasury holds auctions for five-year Treasury notes (IEI) each month. In this article, we’ll analyze the highlights of five-year Treasury notes auction for the week ended June 27.

Five-year T-notes auction held on June 25

The U.S. Treasury auctioned $35 billion in five-year T-notes in the week ended June 27. The notes were issued at a coupon rate of 1.625% in the June auction. This was higher than the 1.5% offered at May’s auction. The high yield awarded for June auction was also higher at 1.67%, compared to 1.51% in May’s auction. Yields for five-year Treasuries, on the Treasury yield curve, declined by 2 basis points, from 1.7% on June 24 to 1.68% on June 25.

Demand metrics

Demand for the five-year auction was strong as dealer bids took the back seat. The bid-to-cover ratio for the auction came in at 2.74x. This was slightly higher than the 2.73x for May’s auction.

Dealer bids came in at ~38% of total accepted competitive bids. This was lower than May’s ratio of 39%.

Direct bids were also down, at ~9%, compared to ~13% in May’s auction. But indirect bids came in at ~53%, surpassing May’s ratio of ~50%.

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Dealers are market makers. They make up any shortfall in demand for the auctioned securities. A lower percentage of accepted dealer bids shows you strong underlying market demand. Currently, there are 22 approved dealers, including financial intermediaries like Citigroup (C). Citigroup (C) is part of the S&P 500 Index (IVV).

Indirect bidders include foreign central banks. A higher allocation to these players shows strong overseas demand. We’ll discuss the reasons and implications for demand and yields in Part 7 of this series.

ETFs like the iShares 3-7 Year Treasury ETF (IEI), the Vanguard Total Bond Market ETF (BND), and the iShares Core Total U.S. Bond Market ETF (AGG) have holdings in five-year Treasury notes. IEF invests primarily in U.S. Treasuries. BND and AGG invest in the U.S. investment-grade bond market, including both government-issued and corporate debt.

In the next article of this series, we’ll analyze the key metrics in the monthly auction for seven-year Treasury notes. Please read on.


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