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Investors Walk Away from the April 2-Year Treasury Notes Auction

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2-year Treasury notes auction

The US Treasury holds monthly auctions for 2-year Treasury notes (or T-notes), which are the shortest maturity Treasury notes. Two-year Treasury notes auctions provide signals about market expectations for short-term rate movements.

Exchange-traded funds (or ETFs) like the iShares 1–3 Year Treasury Bond Fund (SHY) have holdings in 2-year Treasury notes. Like other notes auctions, they are 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 in the past three monthly auctions.
  • The issue’s coupon rate was 0.5%—the same as in March.
  • The high yield for April’s auction was lower at 0.540%—the lowest this year—compared with 0.598% in March.

Market demand falls

Overall demand for the 2-year notes fell. The bid-to-cover ratio, which indicates overall demand, fell 4.6% to 3.30x in April. The ratio had risen by 0.3% to 3.46x in March. The bid-to-cover ratio is an important demand indicator that identifies the total value of bids received divided by the value of securities on offer. A higher ratio implies higher demand, and vice versa.

In addition to weak overall demand, market demand also fell from March. April’s market demand was 52.7% of the competitive accepted bids, compared with 64.0% in March’s auction. Both direct and indirect bidder allotments fell from the previous month. Indirect bidders—a category that includes foreign central banks—accounted for 38.1% of the accepted bids from 45.7% in the previous month.

Direct bids fell to 14.6% from 18.3% month-over-month. Direct bids include bids from domestic money managers including American International Group (AIG) and Wells Fargo (WFC).

Dealer takedown rises

Primary dealer takedown was higher due to lower market demand. It was 47.3% of competitive accepted bids—the highest since December 2014—up from 36.0% in March’s auction.

Primary dealers act as market makers for the auctioned securities, and they are required to bid at auctions. Primary dealers include financial institutions like Goldman Sachs (GS). A higher percentage of dealer-accepted bids implies lower market demand, and vice versa.

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