US: 5-Yr Note Auction

Wed Dec 27 12:00:00 CST 2017

Actual Previous
Total Amount $34 B $34 B
Coupon Rate 2.125% 2.000%
Bid/Cover 2.36 2.46
Yield Awarded 2.245% 2.066%
CUSIP Number 912828N30
Originally Announced CUSIP 9128283M0

Results are soft for the monthly 5-year note auction, where coverage, at 2.36, was the lowest since June and the bidding was sloppy, pushing up the high yield to the awarded 2.245 percent, about 1.4 basis points above the 1:00 bid. Weak demand from end investors is apparent from the low non-dealer takedown of the $34 billion offering, which at 66 percent is the smallest in 8 months. The awarded high yield was 17.9 basis points higher than last month's auction rate and the highest since March 2011. Please note that although today's auction was announced on December 21, 2017 as an offering of a new 5-year note with CUSIP NO. 9128283M0, the interest rate determined at the auction matches that of an outstanding 7-year note with the same maturity and interest payment dates, and in accordance with auction procedure, the 5-year notes will instead be considered an additional issue of the outstanding 7-year notes with CUSIP NO. 912828N30, originally issued December 31, 2015.

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. A group of securities dealers, known as primary dealers, are authorized and obligated to submit competitive tenders at Treasury auctions. Dealers can hold the bills, resell the bills to their clients or trade them with other securities firms. Typically, the New York Fed approves about 20 securities firms to be primary dealers but that number dropped sharply during the 2008 financial crisis as some were merged into other firms or went bankrupt. The Fed has been rebuilding that number regularly and the latest list can be found here. The Treasury announces the amount, date and time of the 5-year note auction monthly. The 5-year notes are announced around the third week of the month (usually on Thursday) and then auctioned the following week. In all cases, the 5-year notes are issued (settled) on the last day of the month, unless it falls on a weekend or holiday, and then they are issued on the next business day. (Department of the Treasury)

Individual investors can participate in Treasury auctions either through a securities dealer (brokerage firm) or via the Treasury Direct program, which saves on brokerage commissions. But brokers commissions are often nominal (especially with discount brokers), and using a broker does eliminate a lot of paper work and other administrative hassles. Brokers facilitate the purchases and sales of Treasuries in the secondary market, which is handy for buying Treasuries at times other than scheduled auctions or for maturities other than those offered by standard new issues.

Interest rates on Treasury securities are determined in the market; the Federal Reserve does not set them. However, bond investors are sensitive to Federal Reserve policy and thus market rates will mirror policy expectations. Usually, bond market players are forward-looking and this means that interest rates on Treasury securities will move in the direction of Fed policy with a lead. As a result, one is more likely to see rising interest rates on Treasury yields during an expansion (and falling yields during economic slowdowns) in advance of policy changes by the Federal Reserve.

Primer on Treasuries
Treasury securities, Treasuries, U.S. government bonds, T-bonds, T-notes, and T-bills all refer to the same type of security: debt obligations of the United States. Maturity refers to the length of the loan to the government. Treasury notes have maturities from 2 to 10 years (2-, 3-, 5-, 7- and 10-year notes are most common). Treasury securities all have minimum denominations of $100.

How notes work
You pay $1,000 for a note. You receive interest payments every six months based on the coupon rate. If the rate is 6%, you get $30 every six months for a total of $60/year. When the note matures in five years, you get back the original investment of $1,000, called the principal.

Investment Profile
Treasuries offer a measure of security unmatched by other investments - the U.S. government guarantees the initial investment (the principal) and interest payments. When Treasuries are resold in the secondary market, their prices are often significantly different than their face value since prices in the secondary market fluctuate based on the economic environment, inflation expectations, Federal Reserve policy, and simple forces of supply and demand. If a Treasury security is held to maturity, inflation and opportunity risks remain. Inflation erodes the value of both the principal and interest payments. Opportunity risk refers to what could have been earned had the money been invested elsewhere.