Key takeaways from last week’s Treasury auctions
In this section, we’ll analyze the demand for last week’s Treasury auctions. Last week, the U.S. Treasury held auctions for $144 billion worth of Treasury securities—both Treasury bills (or T-Bills), $83 billion, and coupon-paying debt, $61 billion.
The U.S. Treasury Department held the monthly auction for the three-year, ten-year and 30-year maturity Treasury securities. Overall, the demand for these was lower compared to June’s auctions, with the bid-to-cover ratio lower for all three.
Last week saw a higher percentage of indirect bid allotments in the three-year, ten-year, and 30-year Treasury auctions compared to the the June auctions. Indirect bidders include foreign sovereigns and central banks. Political unrest in the Middle East has been a key factor spiking the demand for Treasuries this year, which are widely seen as a safe-haven in times of political and economic stress.
However, lower market demand from domestic bidders is probably because investors believe the economy is gaining traction. Usually, bond yields increase as a result of an improving economy, which lowers bond prices. If investors believe that yields on bonds are too low and bond prices too high, they will refrain from bidding.
Impact of last week’s market activity on the yield curve
Treasury yields, between two to 30 years were down in the week ending July 11. 30-year Treasury yields declined by 13 basis points during the week to end at 3.34% on July 11. Political unrest in Gaza and Iraq as well as concerns over the Portuguese bank, Banco Espirito Santo (or BES), fueled demand for Treasury securities.
BES is Portugal’s second largest lender. Markets were worried that BES would become entangled in the debt woes of a parent company, after a group company missed a debt payment. Markets were also worried that this was a sign of a larger debt contagion among European banks. This made U.S. Treasuries a safer asset compared to European bonds.
The decline in Treasury yields was also influenced by the release of the Fed’s June Federal Open Market Committee (or FOMC) minutes on July 9, which reiterated the Fed’s accommodative monetary policy stance.
Popular exchange-traded funds (or ETFs) investing in Treasury securities include the iShares 20+ Year Treasury Bond (TLT), the iShares 7–10 Year Treasury Bond ETF (IEF), the Vanguard Total Bond Market ETF (BND), and the iShares Core Total U.S. Bond Market ETF (AGG).
Treasury auctions are also of great interest to stock markets (VOO) because yields on Treasury securities like ten-year notes are often used as benchmarks for determining the required rates of return on other investments as well. The Vanguard S&P 500 ETF (VOO) is one ETF that tracks a broad-based index such as the S&P 500 Index. To learn about the key takeaways from the FOMC minutes released last week, please read the Market Realist series June FOMC minutes: Key points for builders and REITs like Annaly.