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.
- 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.
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).
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.
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%.