Why direct bidding was strong for the 10-year T-notes auction


Dec. 4 2020, Updated 10:53 a.m. ET

$24 billion of ten-year T-notes auctioned

The US Department of the Treasury holds a ten-year Treasury (IEF) notes (or T-notes) auction every month. The ten-year Treasury (UST) yield is a benchmark yield for financial markets. It’s used to compute the equity risk premiums for stocks (SPY). It’s also used as a benchmark yield for real estate mortgages.

It affects returns on exchange-traded funds (or ETFs) like the Vanguard REIT ETF (VNQ) and the State Street SPDR Homebuilders ETF (XHB).

ETFs—like the iShares 7-10 Year Treasury Bond ETF (IEF) and the ProShares Ultra 7-10 Year Treasury ETF (UST)—provide exposure to ten-year T-notes.

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Auction highlights

  • The auction was held on November 12.
  • The auction size was set at $24 billion—$3 billion higher than October’s auction.
  • The issue’s coupon rate was lower at 2.25%—compared to 2.375% in October.
  • The high yield for November’s auction was lower at 2.365%—compared to 2.381% in October.

Direct bidding stronger at November’s auction

Despite the higher auction supply, the bid-to-cover ratio was unchanged at 2.5x month-over-month. The ratio has averaged 2.7x in all the auctions held in 2014.

Market demand for the ten-year notes increased in November on higher direct bids. The percentage of direct bids increased from ~6.7% to ~13.4% in the November auction. Direct bids include bids from domestic money managers—for example, American Insurance Group (AIG). Indirect bidders include foreign central banks. They accounted for ~44.7% of the bids. This was up slightly from ~44.4% last month.

Primary dealer takedown at the auction fell to ~42% of competitive bids—from ~49% in October’s auction. Primary dealers act as market makers for the auctioned securities. They’re obligated to bid at auctions. They include financial institutions like Goldman, Sachs and Co. (GS).

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Yields analysis

After the auction, ten-year Treasury yields fell by one basis point—or 0.01%—to 2.37% on Wednesday. Bond markets were closed on Tuesday for the Veterans Day holiday. With less market-moving data on Wednesday, Treasury yields didn’t change much. You’ll read more about the Treasury yield curve and other indicators that released last week in Parts 5, 6, and 7 in this series.

Three-year T-notes auction

In the next part of this series, we’ll analyze the key highlights from last week’s Treasury auction for three-year T-notes.


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