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Direct Bidders Lose Interest in 3-Year Treasury Notes Auction

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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 to stock and bond market participants.

Mutual funds such as the MFS Government Securities Fund – Class A (MFGSX) and the Prudential Government Income Fund – Class A (PGVAX) provide exposure to three-year Treasury notes. ETFs like the iShares 1-3 Years Treasury Bond Fund (SHY) have holdings in three-year Treasury notes.

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Key takeaways

  • The auction was held on March 8.
  • The auction size was set at $24 billion, $1 billion higher than the previous auction.
  • The coupon rate came in at 1.0%, higher than the 0.75% in February’s auction.
  • The high yield for March’s auction rose and came in at 1.0% as compared to 0.84% in the February auction.

Bid-to-cover ratio

The bid-to-cover ratio fell marginally by 1.1% to 2.7x in March’s auction, which is its lowest in recent times. Bid-to-cover depicts the overall demand for the auction. The overall demand for three-year Treasury notes fell as investors took a flight from safe-haven assets to stock markets and other riskier assets due to the rebound in oil prices.

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Yield analysis

The yield on three-year T-notes went down by four basis points in the secondary market after the auction from 1.1% on March 7 to 1.0% on March 8.

Demand analysis

The fundamental market demand for the three-year T-notes nudged down and was recorded at its lowest since the December 2015 auction. Total competitive bids (indirect+direct) came in at 55.3% in March as compared to 56.5% in the previous month.

Indirect bids rose to 46.2% in March from 41.5% in February. Indirect bids are mainly from foreign central banks. Meanwhile, direct bids fell from 15.0% in February to 9.1% in March. Direct bidders include money managers like Wells Fargo (WFC) and Invesco (IVZ).

Due to the drop in market demand, the share of primary dealers rose to 44.7% in March from 43.6% 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 next articles, we will look at Treasury bills auctions last week.

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