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

Indirect Bidding Rose at the 2-Year Treasury Notes Auction


Aug. 3 2015, Published 1:07 p.m. ET

Borrowing amount maintained

The U.S. Department of the Treasury holds monthly auctions for the two-year Treasury notes, or T-notes. The yield on the two-year T-notes is related to movements in the federal funds rate. Therefore, these auctions attract a lot of attention from stock and bond market participants.

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Key takeaways

  • The auction was held on July 28.
  • The auction size was set at $26 billion. The amount has remained the same since the January 2015 auction.
  • The issue’s coupon rate was set at 0.625%—the same as in June.
  • The high yield for July’s auction was lower at 0.690%—compared to 0.692% in June.

Yield analysis

The two-year T-note was in demand from domestic and foreign investors due to the attractive Treasury yields—compared to its developed market peers.

The yield on the two-year T-notes rose slightly by 1 basis point in the secondary market from the previous day. It ended July 28 at 0.69%—compared to 0.68% on July 27.

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Demand analysis

The bid-to-cover ratio is an important indicator of overall demand. 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.

The demand for the two-year T-notes was higher in the July auction. The bid-to-cover ratio rose by 4.30% month-over-month to 3.42x in July’s auction. Until now in 2015, the ratio has averaged 3.44x—higher than the average of 3.37x for the auctions held in 2014.

The market demand at the auction rose month-over-month. It came in at 72.30% of the competitive bids—compared to 62.80% in June. Indirect bidders accounted for 54.40% of the bids. This was up from 52.60% last month. Indirect bids include foreign central banks. In contrast, the percentage of direct bids rose to 17.90% from 10.20% month-over-month. Direct bidders include money managers like Wells Fargo (WFC) and Invesco (IVZ).

Due to the rise in market demand, primary dealer allotments were lower at 27.80% of the competitive accepted bids from 37.20% a month ago. Primary dealers include companies like JPMorgan Chase (JPM).

Investment Impact

Mutual funds like the MFS Government Securities A (MFGSX) and the Oppenheimer Limited-Term Government A (OPGVX) provide exposure to T-notes.

  • The MFS Government Securities A invests around 21% of its assets in the maturity range of 1–3 years. It returned 0.23% last week.
  • The Oppenheimer Limited-Term Government A invests almost 45% of its assets in the maturity range of 1–3 years. The fund’s week-over-week return came in at 0.14%.

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