Why was indirect bidder demand for 30-year bonds higher?

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Nov. 26 2019, Updated 12:49 a.m. ET

The U.S. Treasury holds 30-year Treasury bond auctions on July 10

Treasury Bonds (or T-Bonds) are issued for maturities over ten years. Original issue auctions for the 30-year bond are held in the months of February, May, August, and November, with reopenings scheduled in the remaining months. As mentioned in the previous section, 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.

The 30-year bond is the longest maturity Treasury security. These auctions attract a lot of market interest from both stock and bond (BND) investors. 30-year mortgage rates (MBB) are linked to the yields on 30-year Treasury (TLT) bonds. As a result, they incluence the housing market (ITB).

 

On July 10, the U.S. Treasury auctioned $13 billion in 3.375% 30-year Treasury bonds. The auction was a re-opening of the auction held in May. Consequently, the bonds are slated for maturity in 29 years and ten months.

Demand analysis: Indirect bidder demand highest since February, 2006

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Demand for the July 30-year bonds auction was in-line with averages seen in 2014. The bid-to-cover ratio for the July auction came in at 2.40x—down from 2.69x recorded in June’s auction. The offer amounts for both auctions were the same at $13 billion. The ratio has averaged ~2.40x in auctions held in 2014.

The bid-to-cover ratio is a measure of demand for the securities on offer. It’s computed as the total value of bids received divided by the value of securities on offer.

Indirect bidders were allocated ~53% of competitive accepted bids—up from ~52% in the June auction. Indirect bids are a measure of overseas demand. The category includes foreign sovereigns and central banks. This was the highest percentage since the Treasury’s February, 2006, auction, when indirect bidders accounted for 65.4% of the bids (Source: Bloomberg).

Demand from overseas bidders has spiked due to recent tensions in the Middle East, earlier in Iraq, and in Gaza over the past week.

The share of direct bids, which include bids from domestic money managers, declined from ~22% to ~11% month-over-month (or MoM). This category gives an indication of domestic underlying market demand for the bonds auctioned.

Primary dealers were allocated ~36% of the competitive accepted bids in the auction—up from ~26% last month. This category includes authorized securities dealers and broker firms who act as market makers for the securities and clear excess supply.

Yield analysis

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The yield awarded at the auction came in at 3.369%. As in the case of the ten-year notes auction, this was the lowest since June, 2013. In comparison, the yield awarded at last month’s auction had come in at 3.444%. 30-year Treasury yields increased by one basis point on July 10 to 3.38%, compared to 3.37% on July 9.

We’ll be analyzing the key takeaways from last week’s Treasury auctions in Part 8 of this series.

Major exchange-traded funds (or ETFs) investing in 30-year Treasury bonds, include the iShares Barclays 20+ Year Treasury Bond Fund (TLT). 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.

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