Why Overall Demand Tanked for the 2-Year Treasury Note in March



March auction of 2-year T-notes

The US Treasury holds monthly auctions for two-year Treasury notes, or T-notes. The yield on the two-year T-note is related to the movement 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 latest 2-year T-note auction was held on March 28. Below are a few key takeaways:

  • The auction size was set at $26 billion, an amount that has been constant since the January 2015 auction.
  • The issue’s coupon rate was set at ~0.88% in the March auction, as compared to 0.75% in February’s auction.
  • The high yield for the March 28 auction was higher at 0.877%, as compared to 0.752% in the previous auction.

Overall demand analysis

The bid-to-cover ratio is an important indicator of overall demand. It is calculated by taking the total value of bids received and dividing it by the value of securities on offer. A higher ratio implies higher demand and vice versa. Notably, the two-year T-note is the most sensitive to interest rate changes.

But demand for the two-year T-note took a dive at the March 28 auction. The bid-to-cover ratio plunged by 11.3% to 2.6x in March’s auction. In 2015, the ratio averaged 3.3x.

We should note here that investors invest in short maturity papers when interest rates are rising. But since the hike in interest rates looks to be slow in 2016, investors did not show much interest in the two-year auction.

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Market demand analysis

Market demand at the auction fell from the previous auction, coming in at 62.6% of competitive bids as compared to 66.6% in February’s auction.

Indirect bidders accounted for 47.4% of the bids, down from 55.8% in the previous auction. Indirect bids include foreign central banks. On the other hand, the percentage of direct bids rose to 15.2% in the March auction from 10.8% % in the February auction. Direct bidders include money managers like Wells Fargo & Company (WFC) and Invesco (IVZ).

Primary dealer allotments rose to 37.4% of competitive accepted bids, up from 33.4% in the previous auction. Primary dealers include companies like J.P. Morgan & Chase (JPM) and Morgan Stanley (MS).

Yield analysis and investment impact

The yield on the two-year Treasury notes remained unchanged on the secondary market on March 28 at 0.89%.

Notably, mutual funds such as the MFS Government Securities Fund Class A (MFGSX) and American Funds US Government Securities Fund Class A (AMUSX) provide exposure to Treasury Notes. MFGSX was up by 0.5% while the AMUSX rose by 0.9% week-over-week. Exchange-traded funds like the iShares 1–3 Years Treasury Bond Fund (SHY) also provide exposure to T-notes. SHY rose by 0.2% week-over-week.

Now it’s time to analyze last week’s Treasury bills auctions.


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