10-Year Treasury Note Index (TNX) (what does it mean)

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S_Track
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10-Year Treasury Note Index (TNX) (what does it mean)

Post by S_Track » Sat Dec 02, 2017 11:44 am

I am confused about the price of a 10-Year Treasury Note Index (TNX). Why does this price fluctuate when the market is open? I assume this is because of trades like stocks but each note has different coupon rates which presumably would bring different costs? Yesterday the market closed at 26.32, what does that number represent?
thanks

stlutz
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Re: 10-Year Treasury Note Index (TNX) (what does it mean)

Post by stlutz » Sat Dec 02, 2017 12:07 pm

It's the yield with the decimal point shifted one place to the right. So, the 10 year yields 2.362. You're setting 23.62 as the quote.

S_Track
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Re: 10-Year Treasury Note Index (TNX) (what does it mean)

Post by S_Track » Sat Dec 02, 2017 2:50 pm

stlutz wrote:
Sat Dec 02, 2017 12:07 pm
It's the yield with the decimal point shifted one place to the right. So, the 10 year yields 2.362. You're setting 23.62 as the quote.
Ok and this yield changes daily because of trades? Does this yield set the bench mark or starting point when the Treasurey holds an auction? Thanks

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Phineas J. Whoopee
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Re: 10-Year Treasury Note Index (TNX) (what does it mean)

Post by Phineas J. Whoopee » Sat Dec 02, 2017 3:58 pm

bob_m10 wrote:
Sat Dec 02, 2017 2:50 pm
stlutz wrote:
Sat Dec 02, 2017 12:07 pm
It's the yield with the decimal point shifted one place to the right. So, the 10 year yields 2.362. You're setting 23.62 as the quote.
Ok and this yield changes daily because of trades? Does this yield set the bench mark or starting point when the Treasurey holds an auction? Thanks
I'll try to be brief. I may fail.

Yes, what you're seeing intraday is due to prices on the secondary market.

Unlike the market for listed stocks, bond markets are over the counter, that is, there are dealers each quoting their own bid and ask prices (which can just as easily be quoted as yields, because the price and yield for an already-issued bond have a mathematical relationship).

The major bond dealers are also among the largest participants in Treasury auctions. They don't follow the market, they are it. They are called price makers. You and I are price takers, as in take it or leave it. An enormous firm like Vanguard has some leverage. For Treasuries, 24/7 some firm somewhere in the world is giving quotes. Not only isn't there any midnight, there isn't even any weekend.

With respect to bond dealing they're making a profit off of spreads between their bids and asks. Anybody who's their customer should expect they're in business to make money, not for their health. That's what keeps them roughly in line with each other for highly-liquid securities, like Treasuries. There are procedural controls so they can't directly access each others bids and asks, which preserves competition.

Bond markets are not unified like those of listed stocks within a single market. Primary market Treasury auctions have their own unique procedures.

If I was too brief, please say so and I'll expand. I'll even link references.

PJW
Last edited by Phineas J. Whoopee on Sat Dec 02, 2017 4:17 pm, edited 1 time in total.

lack_ey
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Re: 10-Year Treasury Note Index (TNX) (what does it mean)

Post by lack_ey » Sat Dec 02, 2017 4:11 pm

Isn't TNX the yield-to-maturity of the most recently auctioned 10-year T-Note, based on secondary market trading? (as opposed to a constant maturity calculation where the rate is interpolated to estimate the rate for a hypothetical exactly-10-years-maturity bond that doesn't always exist)

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Phineas J. Whoopee
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Re: 10-Year Treasury Note Index (TNX) (what does it mean)

Post by Phineas J. Whoopee » Sat Dec 02, 2017 4:25 pm

lack_ey wrote:
Sat Dec 02, 2017 4:11 pm
Isn't TNX the yield-to-maturity of the most recently auctioned 10-year T-Note, based on secondary market trading? (as opposed to a constant maturity calculation where the rate is interpolated to estimate the rate for a hypothetical exactly-10-years-maturity bond that doesn't always exist)
Yes, lack_ey, that's roughly in accord with my understanding.
PJW

S_Track
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Re: 10-Year Treasury Note Index (TNX) (what does it mean)

Post by S_Track » Sat Dec 02, 2017 8:18 pm

Phineas J. Whoopee wrote:
Sat Dec 02, 2017 3:58 pm
bob_m10 wrote:
Sat Dec 02, 2017 2:50 pm
stlutz wrote:
Sat Dec 02, 2017 12:07 pm
It's the yield with the decimal point shifted one place to the right. So, the 10 year yields 2.362. You're setting 23.62 as the quote.
Ok and this yield changes daily because of trades? Does this yield set the bench mark or starting point when the Treasurey holds an auction? Thanks
I'll try to be brief. I may fail.

Yes, what you're seeing intraday is due to prices on the secondary market.

Unlike the market for listed stocks, bond markets are over the counter, that is, there are dealers each quoting their own bid and ask prices (which can just as easily be quoted as yields, because the price and yield for an already-issued bond have a mathematical relationship).

The major bond dealers are also among the largest participants in Treasury auctions. They don't follow the market, they are it. They are called price makers. You and I are price takers, as in take it or leave it. An enormous firm like Vanguard has some leverage. For Treasuries, 24/7 some firm somewhere in the world is giving quotes. Not only isn't there any midnight, there isn't even any weekend.

With respect to bond dealing they're making a profit off of spreads between their bids and asks. Anybody who's their customer should expect they're in business to make money, not for their health. That's what keeps them roughly in line with each other for highly-liquid securities, like Treasuries. There are procedural controls so they can't directly access each others bids and asks, which preserves competition.

Bond markets are not unified like those of listed stocks within a single market. Primary market Treasury auctions have their own unique procedures.

If I was too brief, please say so and I'll expand. I'll even link references.

PJW
Just the right amount of detail for me. I was searching the net this morning and could not find anything that put it all together. Thanks

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Doc
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Re: 10-Year Treasury Note Index (TNX) (what does it mean)

Post by Doc » Sat Dec 02, 2017 8:36 pm

@PJW

Well said.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

S_Track
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Re: 10-Year Treasury Note Index (TNX) (what does it mean)

Post by S_Track » Mon Dec 04, 2017 9:05 am

Phineas J. Whoopee wrote:
Sat Dec 02, 2017 3:58 pm
bob_m10 wrote:
Sat Dec 02, 2017 2:50 pm
stlutz wrote:
Sat Dec 02, 2017 12:07 pm
It's the yield with the decimal point shifted one place to the right. So, the 10 year yields 2.362. You're setting 23.62 as the quote.
Ok and this yield changes daily because of trades? Does this yield set the bench mark or starting point when the Treasurey holds an auction? Thanks
Unlike the market for listed stocks, bond markets are over the counter, that is, there are dealers each quoting their own bid and ask prices (which can just as easily be quoted as yields, because the price and yield for an already-issued bond have a mathematical relationship).

PJW
If we see the yield of TNX falling, does that mean something like VG Total Bond will generaly rise in price at the end of the day? thanks

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Doc
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Re: 10-Year Treasury Note Index (TNX) (what does it mean)

Post by Doc » Mon Dec 04, 2017 10:54 am

bob_m10 wrote:
Mon Dec 04, 2017 9:05 am
If we see the yield of TNX falling, does that mean something like VG Total Bond will generaly rise in price at the end of the day? thanks
Yes but with the emphasis on "generally".

In a "flight to quality" situation like a stock market crash or some other unusual and negative event the price of the ten will rise but TBM may fall because of the non-Treasuries in it. No way to know ahead of time.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.

lack_ey
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Re: 10-Year Treasury Note Index (TNX) (what does it mean)

Post by lack_ey » Mon Dec 04, 2017 12:02 pm

bob_m10 wrote:
Mon Dec 04, 2017 9:05 am
If we see the yield of TNX falling, does that mean something like VG Total Bond will generaly rise in price at the end of the day? thanks
Generally yes as described above.

In the last five years, running a regression of weekly returns of VBMFX (the total bond mutual fund) against the weekly change in ten-year Treasury yield (I use constant-maturity data from FRED rather than TNX specifically, which should be extremely close in character but not exactly the same), I see that the percentage return of total bond is inversely related to the change in the ten-year Treasury yield. The coefficient is -4.39, so for every 0.1% drop in yield, a 0.439% rise in price of total bond on average. The t-stat is -52.3 with R^2 of 0.913, so the relationship has been extremely strong over this fairly calm period in the bond markets. The vast majority of the variation in the return is explained by the Treasury rate movements, even if given a single benchmark figure and not the entire yield curve.

When corporate bonds diverge more, like you saw in the previous five years before that, or even to the extent MBS act differently, you will see less of a relationship. Over late 2007 to late 2010, covering the financial crisis and a big part of the recovery in the credit market, the coefficient was -3.22 with R^2 of 0.628 (t-stat -16.2).

S_Track
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Re: 10-Year Treasury Note Index (TNX) (what does it mean)

Post by S_Track » Mon Dec 04, 2017 6:27 pm

Thank you both for explaining that.

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