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-three primary dealers (as of July 2006) are authorized and obligated to submit competitive tenders at Treasury auctions. Dealers can hold, resell, or trade the securities with other firms. With the May 7, 2007, auction, the Treasury has suspended issuance of three year notes until further notice. Why Investors Care
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Highlights
The Treasury's 3-year note auction, and the last such auction for now, was awarded at a high yield of 4.574 percent, in line with expectations. But the small $14 billion offering size didn't boost coverage, as a bid-to-cover of 2.39 was below 2.97 posted at the 3-year auction during the Treasury's last quarterly refunding in February. Citing an improving budget outlook, the Treasury said last week it is eliminating the 3-year auction. Demand from non-dealers, such as insurance companies and pension funds, was light as the group made up only 19 percent of bidders, below a long term average of more than 30 percent. Treasuries showed no reaction to the results. The Treasury will auction $13 billion of 10-year notes on Tuesday and $5 billion of 30-year bonds on Thursday.
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When the 3-year note is higher than the federal funds rate, it usually suggests that bond investors are expecting the federal funds rate to rise. Conversely, when the 3-year note is lower than the fed funds rate, it suggests that investors are anticipating a rate cut -- or at least some stability in policy. This chart shows the average monthly 3-year note yield, not the latest auction results. |
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