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

Why Fundamental Market Demand Rose for 5-Year Treasury Notes Auction


May. 2 2016, Updated 2:52 p.m. ET

Five-year Treasury notes auction

The five-year Treasury maturity is important. The difference between 30-year and five-year Treasury notes (or T-note) yields indicates the slope of the yield curve. The US Treasury Department holds auctions of five-year T-notes every month.

Mutual funds like the Vanguard GNMA Fund – Investor Shares (VFIIX) and the T. Rowe Price US Treasury Long-Term Fund (PRULX) invest in five-year Treasury notes. ETFs such as the iShares 3-7 Year Treasury Bond Fund (IEI) also provide exposure to five-year Treasury notes.

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Key takeaways

  • On April 26, 2016, five-year Treasury notes worth $34 billion were auctioned, the same as in the previous month’s auction.
  • The issue’s coupon rate was set higher at 1.38%, compared to 1.25% in March’s auction.
  • The high yield for April’s auction was higher at 1.41%, compared to 1.34% in March’s auction.
  • The bid-to-cover ratio rose 1.3% and came in at 2.4x in April’s auction. The bid-to-cover ratio depicts overall demand for the auction.

Market demand analysis

Fundamental market demand, which includes bids from direct and indirect bidders, rocketed from 61.1% of the accepted competitive bids in March to 70.2% in April’s auction.

The FOMC (Federal Open Market Committee) meeting indicated that the Federal Reserve would go slow in raising the interest rates as a slowdown in global markets especially China has been a concern although the domestic economy is improving. This is positive news for intermediate bonds, as their value falls more when interest rates are increased due to the inverse relationship between price and yields.

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Indirect bidders, a category that includes foreign central banks, accounted for 63.5% of the accepted bids in April, up from 53.9% in March. Meanwhile, the percentage of direct bids nudged down to 6.8% in April from 7.2% in March. Direct bids include bids from domestic money managers like Invesco (IVZ) and Wells Fargo & Company (WFC).

Due to the rise in market demand, primary dealers like Credit Suisse (CS) and Morgan Stanley (MS) had to take down a smaller amount of the auction. The dealer’s takedown was 29.8% of accepted competitive bids, down from 38.9% in March’s auction.

Yield analysis

The yield on five-year Treasury notes in the secondary market moved up by two basis points after the auction from the previous day. It ended April 26 at 1.40% compared to 1.38% on April 25.

In the next article, we’ll analyze the two-year Treasury note auction.


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