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.
- 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.
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.