Why Did the Bid-to-Cover Ratio Jump for 30-Year Treasury Bonds?



30-year Treasury bonds

The monthly auction for 30-year Treasury bonds (or T-bonds) was held on March 10 for $12 billion, $3 billion lower than the previous month. Auctions are watched by stock and bond (AGG) investors. Long-term Treasury yields (TLT) reflect economic growth and inflation expectations. They also affect returns in the real estate sector.

As a result, the returns on real estate investment trusts (or REITs) like American Capital Agency (AGNC) and ETFs like the iShares US Real Estate ETF (IYR) are closely influenced by 30-year Treasury bond yields.

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Key takeaways

  • The auction was held on March 10.
  • The coupon rate was set at 2.5%, the same as in the previous month.
  • The high yield rose to 2.7% in March from 2.5% in February’s auction.

Bid-to-cover ratio

The bid-to-cover ratio jumped 11.5% and came in at 2.3x in the March auction, which was highest year-to-date (or YTD). In 2015, the ratio had averaged 2.3x. Bid-to-cover ratio depicts overall demand for the auction.

Due to the rise in the 30-year Treasury bond yields after the European Central Bank (or ECB) announced stimulus measures in the form of interest rate cuts and bond-buying programs, the demand for 30-year Treasury bonds rose as market participants were expecting that the Federal Reserve may also announce a hike in federal fund rates. And due to the inverse relationship between price and yields, the decline in the price of long-term bonds will be less than that of short-term bonds.

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Yield analysis

The yield on 30-year Treasury bonds rose by two basis points in the secondary market from 2.68% on March 9 to 2.70% on March 10.

Fundamental demand rose

Market demand rose to 73.0% of the accepted bids compared to 68.3% in February’s auction. Indirect bids rose and came in at 61.0% in March as compared to 58.0% in February. Indirect bids, or bids from foreign central banks, reflect overseas demand for Treasury bonds.

Direct bids rose to 12.0% in March from 10.3% in February. The share of direct bids includes bids from domestic money managers like Wells Fargo (WFC) and Invesco (IVZ).

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Primary dealers’ shares fell due to the rise in accepted bids from direct and indirect bidders. The share of primary dealers was down from 31.7% to 27.0% month-over-month. Primary dealers act as market makers and include companies like Goldman Sachs (GS) and Citigroup (C). They are obliged to take the excess supply of an auction.

Investment impact

The following mutual funds provide exposure to long-term Treasury bonds. Due to a fall in long-term yields in the secondary market, returns of the long-term mutual funds were positive.

The Wasatch-Hoisington US Treasury (WHOSX) invests ~100% of its assets in Treasury securities with maturities of over ten years. Week-over-week, the WHOSX was down by 0.9%.

The Dreyfus US Treasury Long Term Fund (DRGBX) invests ~92% of its assets in Treasury securities with maturities of over ten years. Last week, the fund fell 0.8%.

In the next article, we will analyze the ten-year Treasury notes auction.


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