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2-Year T-Notes Attract Higher Market Demand in March 2015

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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.

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Key takeaways

  • 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.

Direct bids rose from 13.3% to 18.3% month-over-month. Direct bids include bids from domestic money managers—for example, AIG (AIG) and Wells Fargo (WFC).

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.

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