It was just yesterday that we noted that higher interest rates may cure higher interest rates. We have now seen our second strong Treasury Note auction this week after the U.S. Treasury had a very poor start to the week with a bad 2-year Treasury note auction followed by a strong 5-year Treasury note auction. Today’s 7-year auction was for $29 billion worth of notes.
The coupon was 1 3/8%, or 1.375%, and the rate went off with a yield of 1.496%. That was lower than where on-the-run Treasury yields had been around 1.505% to 1.51% ahead of the auction.
Some $78.36 billion in notes were tendered in this $29 billion auction and that generated a bid-to-cover ratio of 2.70 today. Primary dealers took only about 38% of the offering, meaning that there was ample demand from direct and indirect bidders. Direct bidders, those for their own accounts, were almost 21% of the bids and the indirect bidders, foreign demand, was actually up over 40% of the auction.
The 10-year Treasury yield is now back down to 2.10%. We also see that the iShares Barclays 7-10 Year Treasury (NYSE: IEF) exchange-traded product is trading up 0.15% at $105.75 against a 52-week range of $105.15 to $109.89.
The good news here is that if rates do rise, the demand for the higher yield is being seen almost immediately. The bad news is that the demand may dry up if the public begins to really fear that rates could start to revert back to their pre-QE norms.
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