Important investor takeaways from the Treasury auctions

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Key takeaways

In the week ended June 27, the U.S. Treasury auctioned $205 billion in debt securities. This included both Treasury bills and Treasury notes (IEF), as well as fixed and floating-rate debt. Overall demand was weaker than in previous auctions. Bid-to-cover ratios declined for all auctioned securities except one-month T-bills. These had a reduced auction offering from the previous week, which helped increase the bid-to-cover ratio. The higher supply of Treasury debt for week ended June 27 was one of the reasons for lower investor demand.

Part 7

Dr. Bullard’s views on a rate hike in Q1 2015

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Fixed-rate debt auctions were further driven by the prospect of rates coming in earlier than expected. Last month, on June 9, at a speech to the Tennessee Bankers Association, the head of the St. Louis Fed, James Bullard, said the FOMC was nearer to its goals than it had been over the past five years.

If progress on economic growth, employment, and inflation continues as expected, rates could rise earlier than many market participants expect. Rates could rise as early as the first quarter of 2015. For more on Dr. Bullard’s views on an earlier-than-expected rate hike, please read the Market Realist series Must-know: St. Louis Fed’s Bullard on the earlier rates increase.

Bond market (AGG) prices and interest rates move in opposite directions. So this would be a bearish signal for fixed-rate debt. Higher interest rates would also impact corporate borrowing, like for companies in the S&P 500 Index (SPY).

Overseas bids rise on geopolitical risk

Another important point from the auctions of the week ended June 27 was higher overseas demand. The percentage of bids from indirect bidders rose for most auctions. This probably is a result of flight-to-safety trades due to the ongoing tensions in Iraq.

Primary dealers were also forced to take up more issuance in the floating-rate and seven-year note auctions. The prospect of an earlier-than-expected rate hike affected demand from direct domestic bidders.

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 Treasury notes. IEI 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.

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