uploads/// Year Treasury Bond Issuance versus Bid Cover Ratio

Overall and Fundamental Demand Rose for 30-Year T-Bonds


Apr. 20 2016, Published 10:30 a.m. ET

30-year T-bonds

The monthly auction for 30-year Treasury bonds, or T-bonds, was held on April 14 at $12 billion—the same as 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 impact returns for the real estate sector.

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

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Key takeaways

  • The auction was held on April 14.
  • The coupon rate was set at 2.5%—the same as the previous month.
  • The high yield fell to 2.6% in April from 2.7% in March.

Bid-to-cover ratio

The bid-to-cover ratio rose 3.0% and came in at 2.4x in the April auction. So far, the bid-to-cover ratio averaged 2.3x year-to-date. The bid-to-cover ratio shows the overall demand for the auction.

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Yield analysis

The yield on 30-year T-bonds rose by 3 basis points in the secondary market to 2.6% on April 14 from the previous day.

Demand analysis

Market demand rose to 75.9% of the accepted bids—compared to 73.0% in March’s auction. Indirect bids rose and came in at 65.1% in April—compared to 61.0% in March. Indirect bids are bids from foreign central banks. They show overseas demand for T-bonds.

Direct bids fell to 10.8% in April from 12.0% in March. The share of direct bids includes bids from domestic money managers like Wells Fargo (WFC) and Invesco (IVZ).

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Primary dealers’ share fell due to the rise in accepted bids from direct and indirect bidders. The share of primary dealers fell from 27.0% to 24.1% month-over-month. Primary dealers act as market makers. They include companies like Goldman Sachs (GS) and Citigroup (C). They’re obliged to take the excess supply of an auction.

The rise in overall and fundamental demand for 30-year T-bonds shows that long-term US bonds continue to attract foreign investors due to negative rates in Europe and Japan.

Investment impact

The following mutual funds provide exposure to long-term T- bonds. Due to a slight rise in long-term yields in the secondary market, long-term mutual funds’ returns were negative.

The Wasatch-Hoisington US Treasury (WHOSX) invests ~100% of its assets in Treasury securities with a maturity greater than ten years. Week-over-week, WHOSX fell by 0.1%.

The Dreyfus US Treasury Long Term Fund (DRGBX) invests ~92% of its assets Treasury securities with a maturity greater than ten years. Last week, the fund fell 0.1%.

In the next part, we’ll analyze the ten-year Treasury notes auction.


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