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Why Treasury yields fell last week despite positive economic data

Part 4
Why Treasury yields fell last week despite positive economic data (Part 4 of 7)

Why did the demand for 6-month T-bills recover in the market?

Recovery after fall in demand for two consecutive weeks

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.

We have already discussed the one-month and three-month T-bill auctions in the previous parts of the series. We will cover the six-month T-bill auction in this part of the series.

26 weekEnlarge Graph

The demand for six-month T-bills recovered sharply as seen in the bid-to-cover ratio moving to 5.28x for the April 28 auction from 4.64x for April 21 auction. Prior to last week’s auction, the demand saw a fall for two weeks after hitting an all-time-high bid-to-cover ratio of 5.35x on April 7. The high discount rate dropped to 0.045% from 0.050% for the April 21 auction indicating aggressive bidding. However, only 47% of $23 billion six-month T-bills were issued at a high discount rate.

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 last week’s auction of the one-year (or 52-week) T-bills and two-year floating rate notes, move on to the next part of the series.

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