5-year Treasury notes saw lower auction demand



Five-year U.S. Treasury notes (or T-notes) auction held on September 24

The five-year Treasury maturity is important. The difference between 30-year and five-year Treasury yields gives the slope of the yield curve. Financial markets pay attention to the shape and slope of the yield curve. The shape and slope provide clues about the future direction of interest rates, economic growth, and inflation expectations.

The difference between five-year and 30-year Treasury (TLT) yields narrowed to 142 basis points (or bps) on September 26. This is the narrowest it has been since January 16, 2009. We’ll discuss the implications of the flattening yield curve in Part 10 in this series.

Exchange-traded funds (or ETFs) like the Core Total U.S. Bond Market ETF (AGG) and the Vanguard Total Bond Market ETF (BND) have holdings in five-year T-notes.

Part 3

Five-year Treasury notes auction highlights

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  • Securities worth $35 billion were auctioned—unchanged from the auctions held in 2014
  • The issue’s coupon rate was higher at 1.75%—compared to ~1.63% in August’s auction
  • The high yield for September’s auction was also higher at ~1.8%—the highest level since May 2011
  • The bid-to-cover ratio fell to 2.56x—the lowest in 2014. The ratio averaged 2.78x in 2014’s auctions.

Demand analysis

The lower bid-to-cover ratio was due to lower market demand. The market demand was ~59% of the competitive accepted bids—compared to ~63.6% in August’s auction. Both direct and indirect bids decreased. Indirect bidders—a category that includes foreign central banks—accounted for ~50.3% of the bids. It was down from ~52.7% in August. The decrease in the percentage of bids allotted to indirect bidders reflects lower overseas demand.

The percentage of direct bids also decreased. It dropped from ~10.8% to ~8.8% month-over-month. Direct bids include bids from domestic money managers—for example, BlackRock (BLK). BLK is part of the SPDR S&P 500 ETF (SPY).

Due to the lower market demand, primary dealer takedown was higher. It was ~41% of competitive accepted bids. It was up from 36.5% in August’s auction.

Yields analysis

Demand for the securities was lower due to rate hike fears after the Fed’s September Federal Open Market Committee (or FOMC) meeting. Investors preferred two-year notes—compared to the five-year and seven-year notes auctioned last week. Short-term bond prices are less sensitive to changes in bond yields—compared to longer maturities.

Two-year floating rate notes auction

In the next part of the series, we’ll discuss the key highlights from last week’s Treasury auction for two-year floating rate notes (or FRNs). The auction was held on September 24.

Visit the High Yield Bond page to learn more.


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