Demand for Treasuries Rises after the Bank of Japan’s Rate Drop
Two-year floating-rate notes
The US Department of the Treasury introduced two-year floating-rate notes in January 2014. A floating-rate note is a debt security. Its name comes from the variable interest payment. The reference for its rate is a benchmark like LIBOR ( Intercontinental Exchange London Interbank Offered Rate) or the three-month Treasury yield. The security’s interest payments rise and fall depending on prevailing market rates. Thus, floating-rate notes have almost no interest rate risk. Mutual funds like the HSBC U.S. Treasury Money Market Fund (HTYXX) and the U.S. Government Securities Ultra-Short Bond Fund (UGSDX) provide exposure to Treasury floating-rate notes.
Key takeaways from the two-year floating-rate note auction
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The auction was held on January 27, 2016.
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In January, two-year floating-rate notes worth $15 billion were auctioned. This was $2 billion more than in December’s auction.
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The bid-to-cover ratio rose by 5.5% to 3.7x from 3.5x at December’s auction.
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The high discount margin fell to 0.27%—6 basis points lower than in December’s auction.
Market demand rose
Market demand rose to 57.3% of the accepted competitive bids in January, compared to 40.9% in December’s auction.
The percentage of direct bidders rose from 1.5% in December to 2.2% in January. Direct bids include bids from domestic money managers like State Street Corporation (STT) and American International Group (AIG). Indirect bids include bids made by foreign central banks and indicate overseas demand. They surged, making up 55.2% of the auction in January as compared to 39.4% a month ago.
Due to a rise in market demand, primary dealer takedown fell to 42.7% from 59.1% at December’s auction. Primary dealers act as market makers. They take up an excess supply of auctioned securities. They include firms like Morgan Stanley (MS), Citigroup (C), and J.P. Morgan (JPM).
Floaters
Floaters see their interest rate payments rise in a rising interest rate environment. This is in contrast to regular Treasuries, which decrease in value. An increase in rates would affect the overall bond market, including mutual funds investing in Treasuries and corporate bonds.
From the next article onward, we’ll analyze the Treasury Bills auction activity last week.
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