US Interest Rates (i.e. Treasury yields in the US) are always a key determinant of asset prices, especially equities. And in today’s context, it is probably more important than ever. Hence, it is vital to keep a close eye on developments within the US Treasury markets. While the secondary market for US Treasuries and yield levels in the secondary market are easy to keep track of (Simply looking at the various sources online, like Bloomberg or FT, to watch the 10 year Treasury yield or the 3 month Treasury Bill yield), keeping track of developments in the primary market for Treasuries offers even better insights for investors. In the space below, we provide a quick summary of where to look and what to look for in the primary market for US Treasuries.
U.S. Treasury marketable securities are debt instruments issued to raise money needed to operate the federal government and pay off maturing obligations. These securities are sold to institutional and individual investors through public auctions. Treasury auctions occur regularly and have a set schedule. There are three steps to an auction: announcement of the auction, bidding, and issuance of the purchased securities.
www.treasurydirect.govs is the website to understand Treasury auctions and more importantly, to track auction results.
www.treasurydirect.gov The website will generally provide a tentative schedule of Treasury Securities auctions and will release the auction results at around 1.00 to 1.30pm Eastern time on the day of the auction.
Lets have a look at a recent Treasury auction result to understand how to read the auction result release and the key points to watch out for. The below is the auction result for the 7 Year Note conducted on 25th of Feb 2021. There are 3 key data points to look out for are –
- The High Yield or the Stop out Yield
- Demand from Real Money vs Primary Dealers in the Auction
- The Bid to Cover Ratio
This particular auction had resulted in a less-than-ideal result and, as you can see from the chart below, Treasuries, in general, fell significantly in response to the poor auction result. (i.e. yield climbed).
The High Yield or the Stop out Yield
The High Yield or the Stop out is the highest yield at which the auction clears. As you know, Treasury auctions are conducted as Uniform Price Auctions. i.e. all the successful bidders in the auction pay the same price. In other words, they all get the same yield. This is the maximum cost (yield) that the Issuer (in this case the US government) has to bear in order to successfully complete the auction and sell the full amount of treasury securities that were intended to be sold in the auction. If this High Yield was significantly above the “When Issued” market yield on that Treasury security, then the auction performance has been less-than-ideal. The “When Issued” yield is basically the yield on the Treasury security just before the auction bidding deadline. Admittedly, for a retail investor, without access to sophisticated real time trading information, it is difficult to assess whether the high yield was significantly above the “When Issued” yield (also called a long “tail”). Nonetheless, the High Yield offers good insight into the pricing and demand for the Treasury security in the auction. In the below image, you can see that the High Yield in the 7 Year Note auction was 1.195%.
Demand from Real Money vs Primary Dealers in the Auction
The result release includes a breakdown of buyers in the auction – broken down into 3 categories – Primary Dealers, Direct Bidders and Indirect Bidders. Indirect Bidders are essentially bidders that bid for the auction via an intermediary. These include key buyers in a Treasury auction like foreign and international monetary authorities. Direct Bidders are essentially non-primary dealer financial institutions that bid directly on the auction i.e. not via an intermediary. These include pension funds, hedge funds, insurers, banks, governments and individuals. Hence, Direct and Indirect Bidders are seen as “real demand” accounts in the auction. Primary Dealers, on the other hand, are mandatorily required to bid in auctions and hence a larger allocation to Primary Dealers is generally seen as an indicator of weak demand. On the other hand, a higher allocation to Direct and Indirect Bidders is seen as a positive result in the auction. In the below image, you can see that the bid quantum and the accepted quantum for Indirect Bidders is the same which indicated weak “real” demand in the auction.
The Bid to Cover Ratio
Lastly and most importantly, the Bid to Cover Ratio is seen as the headline indicator of the Treasury auction performance and usually is the main metric reported in financial media. It is calculated as Total Tendered Bids divided by Total Accepted Bids. A lower than recent average ratio is perceived to be very negative. In this auction, the Bid to Cover ratio was 2.04 which was fairly below recent averages in the Treasury note auctions and hence perceived very negatively by the market.
Hope this helps you read treasury auction results release better and keep your fingers on the pulse of the US treasury market.
To learn how a Uniform Price Auction works, together with a numerical example, take our Fixed Income Analysis course and watch the video at the below link!