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

Overall Demand Barely Moved for 2-Year Treasury Note Auction

Lynn Noah - Author

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

Two-year Treasury note

The US Treasury holds monthly auctions for the two-year Treasury note. The yield on the two-year Treasury note is related to 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 auction was held on April 25, 2016.
  • The auction size was set at $26 billion. The amount has been constant since the January 2015 auction.
  • The issue’s coupon rate was lower at 0.75% compared to 0.88% in the March auction.
  • The high yield for the April 25 auction was lower at 0.84% compared to 0.88% in the previous auction.

Overall demand analysis

The bid-to-cover ratio is an important indicator of overall demand. It’s the total value of bids received divided by the value of securities on offer. A higher ratio implies higher demand and vice versa.

Demand for the two-year Treasury note rose in the April 25 auction. The bid-to-cover ratio rose by 2.3% to 2.64x in April’s auction. The ratio has averaged 3.8x so far in 2016.

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Market demand analysis

Market demand at the auction nudged down from the previous auction. It came in at 61.6% of the competitive bids in April, compared to 62.6% in March’s auction.

Indirect bidders accounted for 47.4% of the bids, marginally up from 47.2% in the previous auction. Indirect bids include foreign central banks. On the other hand, the percentage of direct bids nudged down to 14.5% in the April auction from 15.2% in the March auction. Direct bidders include money managers like Wells Fargo (WFC) and Invesco (IVZ).

Primary dealer allotments rose slightly to 38.4% of the competitive accepted bids from 37.4% in the previous auction. Primary dealers include companies like JPMorgan Chase (JPM) and Morgan Stanley (MS).

Yield analysis

The yield on the two-year Treasury note rose by one basis point in the secondary market. It ended at 0.85% on April 25, compared to 0.84% on April 22.

Investment impact

Mutual funds such as the MFS Government Securities Fund – Class A (MFGSX) and the PIMCO GNMA Fund – Class A (PAGNX) provide exposure to Treasury Notes. The MFGSX and the PAGNX were up by 0.2% each last week.

Meanwhile, ETFs like the iShares 1-3 Years Treasury Bond Fund (SHY), which have holdings in three-year Treasury notes were up by 0.1% week-over-week.

In the next article, we’ll analyze the two-year floating rate notes auction.


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