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

7-year T-Notes Auction: Demand Weakest in Nearly 6 Years


Apr. 2 2015, Updated 7:06 p.m. ET

Seven-year T-notes auction

The U.S. Department of the Treasury holds auctions for seven-year Treasury notes, or T-notes, every month. Seven-year Treasuries are intermediate-term maturities. This means they’re in the middle of the yield curve. Future economic growth and inflation expectations are key yield drivers. Their prices are also more sensitive to changes in yields—compared to shorter Treasury (SHY) maturities.

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

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Key takeaways

  • The auction size was $29 billion. The auction date was set on March 26, 2015.
  • Overall demand was lower from the previous month. The bid-to-cover ratio fell 2.1% to 2.3x—compared to 2.4x at February’s auction. This was the weakest in nearly six years.
  • The high yield fell to 1.79% in March. It was 1.83% at the February auction.

Auction analysis

Market demand for the T-notes was slightly weaker at 62.81% in March—compared to 62.85% in February. This was mainly due to lower indirect bids. The percentage of indirect bids fell to 50.5% in March. It was 52.3% in February. Indirect bidders include foreign central banks. They indicate overseas demand for the auctioned securities.

In contrast, direct bids—as a percentage of competitive accepted bids—rose from 10.5% in February to 12.3% in March. Direct bids include bids from domestic money managers—like BlackRock (BLK) and State Street (STT).

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Due to the marginally lower market demand month-over-month, dealer takedown was marginally higher at 37.19%—compared to 37.15% in February. Primary dealers are a group of 22 authorized securities dealers or brokers. They include companies like Citigroup (C) and Goldman Sachs (GS). They’re required to bid at Treasury auctions. They clean up excess supply.

Yield analysis

After the auction, yields on seven-year T-notes rose in the secondary market. They ended the day eight basis points higher than the previous day’s close of 1.73%. Although this segment gave positive returns YTD (year-to-date) and outperformed investment-grade bonds tracked by Vanguard Total Bond Market ETF (BND), it trailed long-term Treasuries (TLT).


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