Definition
Treasury notes are sold at regularly scheduled public auctions. The competitive bids at these auctions determine the interest rate paid on each Treasury note issue. Twenty-two primary dealers are authorized and obligated to submit competitive tenders at Treasury auctions. Dealers can hold, resell, or trade the securities with other firms. The Treasury announces the amount, date and time of the 10-year note auction four times a year - on the first Wednesday of February, May, August and November. The note is auctioned the following week, usually on Thursday and it is issued (settled) on the 15th of the month. If the 15th falls on a weekend or a holiday, it is issued on the next business day. The U.S. Treasury also announces a re-opening* of the 10-year note at the beginning (usually the second week of the month) of March, June, September, and December. The 10-year note is then auctioned later in the week (usually on Thursday) and issued on the 15th of the month with the same exception if it is a weekend or holiday.
**According to the Treasury, "In a reopening, we issue an additional amount of a previously-issued note. The reopened security has the same maturity date and interest rate as the original security; however, compared to the original security, the reopened security has a different issue date and usually a different purchase price. If the price determined at the reopening exceeds the par value of the security, you will owe a premium. Also, when buying a reopened security, you must pay the interest the security earned before you bought it; however, we will pay this interest -- it's called "accrued interest" -- back to you in your first semiannual interest payment." Why Investors Care
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Highlights
The Treasury wound up another successful quarterly refunding with a strong 10-year auction, that fetched a high yield of 4.220% which was about 1 basis point lower than the when-issued note at the 1:00 p.m. ET bidding deadline.
The bid-to-cover ratio also showed strength, at 2.33 vs. 2.35 in the prior auction in March and against a long-term average of 2.11.
Demand from non-dealers was solid. Indirect bidders accounted for 31.4% of accepted competitive bids, well up from 11.7% in March, which was a reopening, and against a long-term average of 29%.
Of special note, a huge 18.9% of the auction was awarded to direct bidders, a level that dwarfs past readings. This may suggest that a single non-dealer bidder, whether a financial institution or a hedge fund, apparently in great need of this security, by-passed the dealer network through the Treasury's Internet service.
Note the high rate on the issue compares against 4.504% in the March auction, a much higher rate that reflected concerns at the time of inflation and the effects of jawboning by Federal Reserve officials, who were complaining of the "conundrum" of long rates. Today's results underscore that the conundrum remains, and it also underscores the limited influence policy makers are having on this key rate.
The bond market moved higher following the results, which however aren't likely to affect other financial markets. Still, the week's refunding results show strong demand for U.S. notes and bonds. Also note that the large direct non-dealer bid may mark a shift in the structure of the auctions themselves.
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