Introduction
The Treasury completed the second of the three legs comprising its August refunding operation today by auctioning $15 billion of five-year notes. Will the recent low yields across most of the Treasury curve hold for a while? I believe they will.
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Earlier today, the Treasury auctioned $15.0 billion of five-year notes. The issue was sold at a market-clearing yield of 3.520%%, and the auction had a bid-to-cover ratio of 2.64. By comparison, the five-year note sold in the Treasury's May refunding went off at a market-clearing yield of 3.927%, with a bid-to-cover ratio of 2.64.
Total competitive and noncompetitive tenders today were $39.649 billion, excluding an allotment of $2.290 billion to the Federal Reserve System. Additional details are contained in the tables below.
I'm not sure how well or poorly this refunding is going overall. Historically, August refundings have had some problems. Perhaps this is because lots of people are on vacation, making it more difficult to do business, particularly in setting up pre-auction swaps, etc.
The sharp rally late last week may also have hurt dealer short positions -- ones already set up against this week's auctions. It is also entirely possible lower yield levels produced by the rally "scared away" some retail buyers.
All in all, I suspect the recent low yields across most of the Treasury curve will hold as "the" lows well into the future. As benchmarks, these were:
Intraday 1:20 PM ET
Date Issue Low Close on 08/11
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08/06 5-Year Note 3.30% 3.38% 3.49%
08/06 10-Year Note 4.17% 4.22% 4.29%
08/06 30-Year Bond 4.97% 5.04% 5.07%
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To conclude its August refunding operation, the Treasury will auction $14.0 billion of 10-year notes tomorrow.
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TABLE 1.
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RESULTS OF THE AUGUST 2004
TREASURY REFUNDING OPERATION*
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Bid/
Auct. Amt. Cover Non-
Date (Bils) Maturity Coupon Yield Price Ratio Comp.#
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08/09 $22.0 08/15/07 2.750% 2.842 99.737 2.02 $0.276
08/11 $15.0 08/15/09 3.500% 3.520% 99.909 2.64 $0.184
08/12 $14.0 08/15/14 <------ Not Yet Auctioned ----->
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*All three issues are dated 8/15/04 and settle on
8/16/04. #Amount of issue (in billions) awarded
based on non-competitive tenders submitted.
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TABLE 2.
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AUGUST 2004 TREASURY REFUNDING OPERATION
-- AWARDS TO "PRIMARY DEALERS"
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Total Comp- Award to
et. Tenders "Primary" Award to
Accepted Dealers* "Primary"
Issue -- ($s in Billions) -- Dealers*
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3-Yr. Note $21.724 $13.798 63.5%
5-Yr. Note $14.816 $ 8.255 55.7%
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Subtotal $36.540 $22.053 60.4%
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May 2004 Refunding
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3-Yr. Note $23.683 $12.791 54.0%
5-Yr. Note $14.778 $ 9.442 63.9%
10-yr. Note $14.798 $ 8.282 56.0%
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Total $53.259 $30.515 57.3%
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February 2004 Refunding
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3-Yr. Note $23.772 $12.526 52.7%
5-Yr. Note $15.783 $ 8.927 56.6%
10-yr. Note $15.866 $ 8.630 54.4%
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Total $55.421 $30.083 54.3%
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November 2003 Refunding
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3-Yr. Note $23.785 $14.759 62.1%
5-Yr. Note $15.816 $10.836 68.5%
10-yr. Note $16.844 $10.237 60.8%
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Total $56.445 $35.832 63.5%
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August 2003 Refunding
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3-Yr. Note $23.722 $19.137 80.7%
5-Yr. Note $17.763 $11.879 66.9%
10-yr. Note $17.760 $12.218 68.8%
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Total $59.245 $43.234 73.0%
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May 2003 Refunding
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3-Yr. Note $21.726 $15.709 72.3%
5-Yr. Note $17.784 $11.909 67.0%
10-yr. Note $17.831 $13.565 76.1%
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Total $57.341 $41.183 71.8%
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*The Treasury definition of "Primary
Dealers" is "submitters bidding for
their own house accounts."
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