Two-year T-notes auction
The U.S. Department of the Treasury holds monthly auctions for two-year Treasury notes, or T-notes. These T-notes have the shortest maturity. Two-year T-notes auctions provide signals about market expectations for short-term rate movements. ETFs—like the iShares 1-3 Years Treasury Bond Fund (SHY)—have holdings in two-year T-notes. Like other T-notes auctions, they’re watched by stock (DIA) and bond (AGG) investors.
- The auction size was set at $26 billion—the same as the February auction.
- The issue’s coupon rate was 0.5%—the same as in February.
- The high yield for March’s auction was marginally lower at 0.598%—compared to 0.603% in February.
Market demand rises
Overall demand for the two-year T-notes was nearly flat. The bid-to-cover ratio indicates overall demand. It rose 0.3% to 3.46x in March. The ratio fell by 7.7% to 3.45x in February. The bid-to-cover ratio is an important demand indicator. It’s the total value of bids received divided by the value of securities on offer. A higher ratio implies higher demand and vice versa.
In contrast, market demand was higher in March than in February. It was 64% of the competitive accepted bids—compared to 61.5% in February’s auction. Although indirect bidder allotments fell from the previous month, direct bidder allotments rose. Indirect bidders—a category that includes foreign central banks—accounted for 45.7% of the bids. They accounted for 48.2% in the previous month.
Dealer takedown lower
Primary dealer takedown was lower due to higher market demand. It was 36% of competitive accepted bids—down from 38.5% in February’s auction. Primary dealers act as market makers for the auctioned securities. They’re required to bid at auctions. They include financial institutions—like Goldman Sachs (GS). A lower percentage of dealer accepted bids implies higher market demand and vice versa.