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T-Notes Auction: Poor Demand amid the FOMC Meeting


Nov. 20 2020, Updated 3:28 p.m. ET

Seven-year T-notes auction

The U.S. Department of the Treasury holds seven-year T-notes (Treasury notes) auctions every month. The auction size was $28 billion and it was held on July 28. The overall demand fell compared to the previous auction because the FOMC (Federal Open Market Committee) meeting didn’t give any clarity regarding an interest rate hike in the future.

Direct bids, which include bids from domestic money managers—for example, Invesco (IVZ) and Wells Fargo (WFC), fell. Indirect bids were mostly flat.

ETFs such as the iShares 7-10 Year Treasury Bond Fund (IEF) and the ProShares Ultra 7-10 Year Treasury Fund (UST) provide exposure to seven-year T-notes.

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Five-year T-notes auction

The five-year T-notes auction (IEI) was held on July 26—the auction size was $34 billion. The bid-to-cover ratio, which measures the overall demand, was down to 2.27x—the weakest since 1.93 in July 2009—from 2.29x at the previous five-year auction in June. The five-year T-notes auction saw the poorest demand in the last seven years. Investors were waiting for clues on the rate hike from the policymakers.

Meanwhile, direct and indirect bidders showed relatively lower interest in the auction. As a result, the fundamental demand fell to the lowest level since September 2015. Primary dealers such as Morgan Stanley (MS) and Credit Suisse (CS) had to take a larger chunk of the auction.

Two-year T-notes auction

The yield on the two-year T-note (SHY) 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 is held monthly.

Two-year T-notes worth $27 billion were auctioned on July 25. The overall demand, as measured by the bid-to-cover ratio, fell by 7.4% from the previous auction to 2.52x—the lowest since December 2008. Investors were reluctant to purchase ahead of the FOMC policy meeting. Direct bids rose, but indirect bids fell sharply compared to the previous auction.

Two-year floating rate notes auction

On July 27, $16 billion worth of two-year FRNs (floating rate notes) were auctioned. The bid-to-cover ratio jumped from 3.15x in the previous auction to 3.82x in July’s auction—the highest since August 2015. Direct bidders received a marginal allotment of the two-year FRNs, while the share of indirect bidders rose compared to the previous auction.

Funds like the HSBC U.S. Treasury Money Market Fund (HTYXX) and the iShares Floating Rate Bond ETF (FLOT) provide exposure to FRNs.


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