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Why Treasury yields fell last week despite positive economic data

Part 2
Why Treasury yields fell last week despite positive economic data (Part 2 of 7)

Why did the demand for 1-month T-bills continue to drop?

Last week’s one-month T-bill auction

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) and $25 billion one-year (or 52-week) T-bills auctioned on April 29; plus, $25 billion three-month (or 13-week) and $23 billion six-month (or 26-week) T-bills auctioned on April 28. The Department of Treasury also auctioned $15 billion floating rate notes on April 29.

4 week TbillEnlarge Graph

 

The demand for one-month T-bills continued to fall from the last week as reflected in the bid-to-cover ratio falling to 4.55x for the April 29 auction compared to 4.83x for the April 22 auction. The bid-to-cover ratio compares the number of bids received (or amount of bids received) in a Treasury auction with number of bids accepted (or amount of securities issued). The higher the ratio, the greater is the demand for the auctioned securities. A bid-to-cover ratio of over two corresponds to a successful auction while ratio of less than one specifies under-bought auction. Although lower than the last week’s auction, the bid-to-cover ratio of 4.83x indicates solid demand for the one-month T-bills.

While the demand slowed moderately, the discount rate decreased to 0.010% last week compared to 0.015% for the week before, indicating aggressive bidding.

ETFs investing in T-bills are SPDR Barclays Capital 1-3 Month T-Bill ETF (BIL) and iShares Barclays Short Treasury Bond Fund (SHV). Investors looking for short-term investment opportunities like T-bills, but are ready to take higher risk can invest in ETFs like PIMCO Enhanced Short Maturity Exchange-Traded Fund (MINT). PIMCO Enhanced Short Maturity Exchange-Traded Fund (MINT) invests in short-term securities such as T-bills, commercial papers, mortgage-backed securities, etc. A total of 70% of the fund’s assets are deployed in securities with maturity of less than a year. Financial services firms like Goldman Sachs (GS) and JPMorgan Chase & Co. (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 know more about the auction of three-month T-bills held on April 28, continue to the next part of the series.

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