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.
- 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.
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).
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.
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.