Market Demand Rises for 7-Year Treasury Notes in June



Seven-year Treasury notes auction

The US Department of the Treasury holds seven-year Treasury notes, or T-notes, auctions 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 than shorter Treasury (SHY) maturities. Exchange-traded funds such as the iShares 7-10 Year Treasury ETF (IEF) and the ProShares Ultra 7-10 Year Treasury ETF (UST) provide exposure to seven-year Treasury notes.

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Key takeaways

  • The auction size was $29 billion and the auction date was June 25, 2015.
  • Overall demand was lower than in the previous month. The bid-to-cover ratio fell 4.4% to 2.4x, down from 2.5x at May’s auction.
  • The high yield rose to 2.15% in June—the highest it’s been in 2015 so far—up from 1.89% at the May auction.

Auction analysis

Market demand for the seven-year Treasury notes was stronger in June at 68.5% of total accepted competitive bids, compared with 65.8% in May. This was due to more indirect bids. The percentage of indirect bids rose to 56.6% in June, up from 53.8% in May. Indirect bidders include foreign central banks. They indicate overseas demand for the auctioned securities.

Meanwhile, direct bids as a percentage of competitive accepted bids fell to 11.9% in June, down from 12% in May. Direct bids include bids from domestic money managers such as BlackRock (BLK) and State Street (STT). These bids fell for the second consecutive month in June.

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Due to the higher market demand month-over-month, dealer takedown was lower at 31.5%, down from 34.2% in May. Primary dealers are a group of 22 authorized securities dealers or brokers. They include companies such as Credit Suisse (CS) 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 Treasury notes marginally rose in the secondary market. They ended June 25 two basis points higher than the previous day’s close of 2.12%. Though this segment has given negative returns so far this year, the quantum of its negative return is less than both investment-grade bonds tracked by the Vanguard Total Bond Market ETF (BND) and long-term Treasuries (TLT).


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