Overall Demand Rises for 3-Year Treasury Notes



Three-year Treasury notes

The US Treasury holds monthly auctions of three-year Treasury notes, or T-notes. The yield on three-year T-notes is related to movements in the federal funds rate. Therefore, it attracts a lot of attention from stock and bond market participants.

Mutual funds like the MFS Government Securities A (MFGSX) and the Prudential Government Income A (PGVAX) provide exposure to three-year T-notes.

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Key takeaways

  • The auction was held on August 11.
  • The auction size was set at $24 billion. It hasn’t changed since the January 2015 auction.
  • The coupon rate stood at 1%. It was 12.5 basis points higher than the July auction.
  • The high yield for August’s auction was higher at 1.013%—compared to 0.932% in July.
  • The bid-to-cover ratio rose by 5.70% to 3.3x in August’s auction.

Yield analysis

The yield on three-year T-notes fell by 6 basis points in the secondary market after the auction. It ended at 1.03% on August 11.

Demand analysis

There was a small fall in the market demand month-over-month. The total competitive bids, indirect and direct, came in at 61%—compared to 61.60% in the previous month.

Indirect bids rose from 47.70% in July to 52.80% in August. Indirect bids are mainly from foreign central banks. Meanwhile, direct bids fell from 13.90% in July to 8.20% in August. Direct bidders include money managers like Wells Fargo (WFC) and Invesco (IVZ).

Due to a fall in market demand, the share of primary dealers rose to 39% from 38.40% a month ago. Primary dealers include companies like JPMorgan Chase (JPM) and Deutsche Bank (DB). A rise in the percentage of primary dealers indicates weak fundamental market demand.

In the rest of this series, we’ll discuss the Treasury bills, or T-bills, auctions last week.


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