Treasury Pricing

betaguy | Oct 25, 2023 | 180 posts since 2022

question about treasury bond pricing.

7 year is currently showing coupon of 4.87% and a yield of 4.93%.

Is the coupon a set number, so the price paid would be at a discount at auction?

Or does the coupon go up at auction?

Thanks

Post an answer

Answers

CTM | Oct 25, 2023 | 179 posts since 2010

I think you are asking a two part question.

Your description of a ~ 7 Yr Treasury Note @ 4.875% with a yield of ~ 4.93% must be a resale in the secondary market. The last 7 Yr Treasury Note auction was on 09/28/23 with an issue date of 10/02/23. It had a coupon of 4.625%, a yield of 4.673% and was priced at 99.715829. The next auction of the 7 Yr Treasury Note is 10/26/23.

The coupon rate for Treasury Notes and Bonds is stated in 1/8% increments. At auction, the price is adjusted to obtain the stated yield.

If you want to see how the Treasury views interest rates across the spectrum of their products, look at the Treasury Par Yield, here (scroll to the bottom of the chart for the latest data):

https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treas...

Treasury Bills and Floating Rate Notes (FRNs) have different pricing mechanisms.

MAKNYC | Oct 25, 2023 | 323 posts since 2015

As CTM suggests, your question is subject to interpretation. In addition to his/her comments, I interpret your question to be about the upcoming 7 year auction scheduled for tomorrow. If so, the coupon on the newly issued (which is not a reopening of a previously issued security) will be determined by the auction results. The coupon will be set at the amount below, but closest to the auction yield. So if the currently existing 7 year is yielding as you say, the coupon would likely be the 4 7/8%. But if the auction went off at a different yield (by 1/8's) then the coupon would be adjusted, for example to 5% and the price would be such that the YTM was the market clearing yield with that new coupon. Essentially auctions of notes/bonds that are newly issued are set with coupons such that they trade at par or slightly below.

betaguy | Oct 25, 2023 | 180 posts since 2022

yes, I was referring to tomorrow's 7yr auction.
You answered my question in that the coupon would be adjusted and not price. Thanks

MAKNYC | Oct 25, 2023 | 323 posts since 2015

That is true, but its important to note that tomorrows auction happens to be for a new security. Treasury frequently 'reopens' earlier issued securities. Their auction announcement would disclose this. For example, they could issue more of the most recently issued 7 year security, making tomorrows auction for a 6 year 11 month issue (but still regarded a 7 year). Or they could have taken a 10 year bond that was issued 3 years ago, hence has 7 years remaining to maturity. They could issue more of those today. Given that the coupon on that 10 year was determined 3 years ago (and hence a lot lower than today's would be) the bond sold tomorrow would have that same coupon, but auction at a meaningful discount price to par to compensate. But neither of these examples apply in this particular case.

betaguy | Oct 25, 2023 | 180 posts since 2022

Thanks for that tidbit.

The financial institution, product, and APY (Annual Percentage Yield) data displayed on this website is gathered from various sources and may not reflect all of the offers available in your region. Although we strive to provide the most accurate data possible, we cannot guarantee its accuracy. The content displayed is for general information purposes only; always verify account details and availability with the financial institution before opening an account. Contact [email protected] to report inaccurate info or to request offers be included in this website. We are not affiliated with the financial institutions included in this website.