The Effect of Treasury Auctions on 10-Year Treasury Note Futures

Abstract

Using 15-minute intervals over the period 2000 - 2017, we show that auctions of U.S. Treasury securities have an economic and statistically significant impact on the 10-year Treasury note futures market. Prices move higher, volatility increases, and there is an upturn in trading volume in the interval immediately following an auction. We find that higher bid-to-cover ratios, and bid-to-cover ratios that exceed the average, lead to positive returns and lower return volatility. This is consistent with bid-to-cover ratios serving as a proxy of demand for the auctioned securities. Primary dealers, who purchase the largest proportion of each issue, have the greatest influence on the market response. This is particularly evident when auction demand increases while they have a short futures position. Together, our results are consistent with traders (particularly primary dealers) buying back short futures hedges immediately following the auction, and suggests that futures are used to hedge at least some inventory risk.