YTD High Yield for the Two-Year Treasury Note Auction



Two-year Treasury note auction

The US Treasury holds monthly auctions for the two-year Treasury note. The yield on the two-year Treasury note 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 September 22.
  • 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 that of the last five auctions.
  • The high yield surged for September’s auction and reached its highest point so far in 2015 at 0.699%—compared to 0.663% in the previous month.

Overall 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.

Demand for the two-year Treasury note was higher in September’s auction. The bid-to-cover ratio rose by 3.5% month-over-month to 3.27x in September’s auction. Until now in 2015, the ratio has averaged 3.39x—higher than the 3.37x average for the auctions held in 2014.

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Market demand analysis

Market demand at the auction fell marginally month-over-month. It came in at 56.5% of the competitive bids compared to 57.4% in August.

Indirect bidders accounted for 43.2% of the bids, which was down from 47.1% last month. Indirect bidders include foreign central banks. On the other hand, the percentage of direct bids rose to 13.3% from 10.3% month-over-month. Direct bidders include money managers such as Wells Fargo (WFC) and Invesco (IVZ).

Due to a fall in market demand, primary dealer allotments were slightly higher at 43.5% of the competitive accepted bids from 42.6% a month ago. Primary dealers include companies such as JPMorgan Chase (JPM) and Morgan Stanley (MS).

Yield analysis

The yield on the two-year Treasury note fell by 3 basis point in the secondary market from the previous day. It ended September 22 at 0.69%—compared to 0.72% on September 21.

Investment impact

Mutual funds such as the MFS Government Securities A (MFGSX) and the Oppenheimer Limited-Term Government A (OPGVX) provide exposure to Treasury Notes.

The MFGSX fund invests around 21% of its assets in the maturity range of 1–3 years. The fund’s return fell 0.16% last week.

The OPGVX fund invests almost 45% of its assets in the maturity range of 1–3 years. The fund’s week-over-week return came in at 0.03%.


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