Yield convergence continues
Treasury bills (or T-bills) are short-term debt obligations issued by the U.S. government through a single-price auction, meaning all the competitive and non-competitive bidders are issued T-bills at a yield quoted by the lowest bidder. T-bills are quoted at a discount to face value.
Last week’s T-bill auctions included $25 billion one-month (or four-week) T-bills auctioned on April 8, plus $25 billion three-month (or 13-week) and $23 billion six-month (or 26-week) T-bills auctioned on April 7. We already discussed the one-month and three-month T-bill auctions in the previous parts of this series. We’ll cover the six-month T-bill auction in this part of the series.
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Demand for six-month Treasury bills has seen a continuous uptrend over the past four weeks, as we’ve seen in the rising bid-to-cover ratio. While the bid-to-cover ratio has remained high in each auction held in 2014, it was highest in the auction held on April 7 at 5.35x.
While the issuance of six-month T-bills remained unchanged from the previous week, at $23 billion, the high discount rate dropped sharply, to 0.050% from 0.065% for the previous auction held on March 31. As the lowest-discount bidder wins the bid and all the securities are issued at the lowest bid for the discount, the reduced discount rate implies aggressive bidding.
The reduction in the six-month T-bill discount rate also confirms the converging trend between three-month and one-month discount rates. This simply means that investors are more willing to invest in six-month T-bills than they were during the last auction.
Investors looking for ETFs investing in T-bills can invest in the SPDR Barclays Capital 1-3 Month T-Bill ETF (BIL) or the iShares Barclays Short Treasury Bond Fund (SHV). Investors looking for short-term investment opportunities like T-bills but ready to take higher risk can invest in ETFs like the PIMCO Enhanced Short Maturity Exchange-Traded Fund (MINT). The PIMCO Enhanced Short Maturity Exchange-Traded Fund (MINT) invests in short-term securities such as T-bills, commercial papers, mortgage-backed securities, et cetera. Of the fund’s assets, 70% are deployed in securities with maturity of less than a year. Financial services firms like Goldman Sachs (GS) and JP Morgan Chase (JPM) regularly issue short-term securities to meet their short-term funding requirements. Investors looking at a short-term horizon may invest in those securities to park their cash for the short term in safer securities.
To find out about the auction of Treasury notes and bonds held last week, read on to the next part of this series.