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 quarterly refunding got off with a surprising bang. The 3-year note was awarded at 4.800 percent, nearly 2 basis points better than expectations. Bid-to-cover, boosted by the small $16 billion offering size, was 2.97 in the strongest reading on the current charts. In an unusually strong reaction to an auction, bonds moved higher immediately following the results.
Interest from non-dealers, that is buyside accounts like insurance companies and pension funds, was strong as the group took 32 percent of the auction -- the biggest share of the last six 3-year auctions.
The Treasury, perhaps needing to trim back offerings if the budget deficit continues to improve, is considering dropping future auctions of the 3-year note, perhaps a factor that added interest to the auction. Today's results point to strong results for tomorrow's 10-year note auction and Thursday's 30-year bond auction.
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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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