The implications of higher yields at the 10-year Treasury auction



The ten-year U.S. Treasury note auction held on September 10

The ten-year Treasury (IEF) note auction is of great interest to stock and bond (BND) market participants. Ten-year Treasury yields are benchmarks for many interest rates, including mortgages (IYR)(VNQ) and equity risk premiums (QQQ).

Part 3

Auction highlights

  • This was a re-opening of August’s auction.
  • The auction size was set at $21 billion—$3 billion lower than August’s auction.
  • The issue’s coupon rate was also the same as August, at 2.375%.
  • The high yield for September’s auction was higher, at 2.535% compared to 2.439% in August.

Demand falls as markets anticipate the FOMC

Demand for ten-year notes was lower in September. Despite the reduced offering, the bid-to-cover ratio declined to 2.71x from 2.83x in August’s auction. The ratio has averaged 2.72x in all the auctions held in 2014.

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Bidding volumes were also lower for all three categories of competitive bids. Primary dealer takedown at the auction fell to ~34% of competitive bids, from ~38% in August’s auction. Primary dealers act as market makers for the auctioned securities and are obligated to bid at auctions. They include financial institutions like JPMorgan (or JPM).

Indirect bidders, which include foreign central banks, accounted for ~53% of the bids, up from ~47% last month. The percentage of direct bids fell from ~15% to ~13% in the September auction. Direct bids include bids from domestic money managers like American Insurance Group (AIG).

Auction analysis

Ten-year Treasuries are long-term maturities, making their prices more sensitive to changes in yields. Future economic growth and inflation expectations are key drivers for yields. Bidding at September’s auction was affected by this week’s Federal Open Market Committee (or FOMC) meeting. Markets were anticipating a more hawkish statement from the Fed, which resulted in both higher yields and lower demand at the ten-year Treasury notes auction.

You can read more about the upcoming FOMC in Part 14 of this series.

30-year Treasury bond auction

The next part of this series will analyze the key highlights of last week’s auction for 30-year Treasury bonds.


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