Why Treasury auctions impact investors and financial markets
The purpose of Treasury auctions is to obtain financing from markets at the most competitive cost. The yield on these securities is determined through a public auction process. These yields affect the secondary market for U.S. Treasuries. Yields and bond prices move in opposite directions.
Nov. 26 2019, Updated 12:41 a.m. ET
Treasury auctions impact investors and financial markets
The U.S. Treasury Department issues Treasury securities to finance government debt. Maturities on the Treasury securities vary. Treasury securities are sold to institutional and retail investors. These auctions are the U.S. Treasury’s main supply source.
Treasury securities may be short-term. These mature in a year or less—for example, Treasury bills (or T-bills). Long-term Treasury securities include Treasury notes and bonds. In 2013, the U.S. Treasury Department issued ~$2.7 trillion worth of marketable securities at 267 auctions.
Importance of Treasury auctions
The purpose of Treasury auctions is to obtain financing from markets at the most competitive cost. The yield on these securities is determined through a public auction process. These yields affect the secondary market for U.S. Treasuries. Yields and bond prices move in opposite directions.
Changes in Treasury yields also affect other debt investments. They affect U.S. corporate debt and the overseas governments’ sovereign debt. These yields are quoted as a spread over Treasuries—depending on their risk profiles. Lower risk corporate or foreign debt would have a lower spread and vice versa.
As a result, Treasury yields affect the performance of fixed income exchange-traded funds (or ETFs) like the iShares 20+ Year Treasury Bond ETF (TLT), the Vanguard Total Bond Market ETF (BND), the iShares iBoxx $ High Yield Corporate Bond ETF, the iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD), the iShares J.P. Morgan USD Emerging Markets Bond ETF, and the ProShares Ultra 7–10 Year Treasury ETF (UST).
They also impact returns on stock market ETFs like the iShares Core S&P 500 ETF (IVV). Treasury yields are used as a proxy for the risk-free rate. They’re used to determine equity risk premiums.
In this series, you’ll read an analysis of Treasury auctions held last week (Parts 5–9). You’ll also find an analysis of key secondary market trends. The analysis will include the effect of recent positive economic trends and the U.S. Federal Reserve’s latest monetary policy release.
