Indirect Bidding Falls, but Is Strong at the 10-Year T-Note Auction



Borrowing quantum increased

The U.S. Department of the Treasury conducts a ten-year Treasury note, or T-note, auction every month. The ten-year Treasury yield is a benchmark yield for financial markets. It’s used to compute the equity risk premiums for stocks. 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 ten-year T-notes.

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Key takeaways

  • The auction was held on March 11.
  • The auction size was set at $21 billion. It was $3 billion lower than February’s auction.
  • The issue’s coupon rate was kept at 2%. It was the same as the previous auction.
  • The high yield for March’s auction was higher at 2.14%—compared to 2% a month ago.
  • The auction saw strong overall demand. So far, the bid-to-cover ratio was at its highest in 2015.

Bid-to-cover ratio rises

The auction saw a higher bid-to-cover ratio than the previous month. The ratio was 2.65x. It was the highest since December 2014—compared to 2.62x in February. So far in 2015, the ratio averaged 2.62x—compared to an average of 2.7x for the auctions held in 2014.

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Market demand falls

Market demand for the ten-year T-note fell in March as both direct and indirect bids fell. The percentage of indirect bids decreased from 59.5% to 58.6% in the March auction. February’s indirect bidding was the highest bidding percentage for this category since December 2011. Indirect bidders include foreign central banks.

In contrast, direct bids decreased from 12.7% in February to 10.2% this month. Direct bids include bids from domestic money managers—for example, State Street Corp. (STT) and BlackRock (BLK).

At the auction, primary dealer bids rose in March due to lower market demand. Their takedown rose to 31.2% of competitive bids—from 27.8% in February’s auction. Primary dealers act as market makers for the auctioned securities. They’re obligated to bid at auctions. They include financial institutions like Credit Suisse (CS).

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Yield analysis

The yield on the ten-year T-note fell in the secondary market. It ended lower than the previous day. The yield fell by three basis points—or 0.03%—to 2.11% on March 11. The yield on the security ended the week higher at 2.13%.

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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