uploads/// Year Treasury Note Issuance versus Bid Cover Ratio

10-year Treasury notes auction saw weak demand


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

Borrowing quantum maintained

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

It affects returns on 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 the ten-year T-notes.

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Key takeaways

  • The auction was held on January 13.
  • The auction size was set at $21 billion—the same as December’s auction.
  • The issue’s coupon rate was kept at 2.25%—the same as December and November.
  • The high yield for January’s auction was lower at 1.930%—compared to 2.214% a month ago.

Bid-to-cover ratio falls

The ten-year T-notes auction saw a lower bid-to-cover ratio than last month. The ratio was 2.6x—compared to ~3x in December. This was the highest in 2014. The ratio had averaged 2.7x in all of the auctions held in 2014.

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Market demand falls

Market demand for the ten-year T-notes fell slightly in January—primarily due to lower indirect bids. The percentage of indirect bids decreased from 53.8% to 50% in the January auction. Indirect bidders include foreign central banks. In contrast, direct bids increased from 6.9% in December to 9.2% in January. Direct bids include bids from domestic money managers—for example, American Insurance Group (AIG).

Demand fell primarily because of the recent sharp declines in Treasury yields—especially since the ten-year T-notes came in below the psychological 2% level.

Primary dealer bids at the auction rose slightly in January. The bids rose due to the lower market demand. The bids’ takedown rose to 40.8% of competitive bids—from 39.3% in December’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 & Co. (GS).

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Yield analysis

After the auction, ten-year Treasury yields fell by one basis point—or 0.01%—to 1.91% on January 13. The yield on the security ended the week much lower at 1.83%.

Three-year T-notes auction

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


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