Why did rates for 3- and 6-month T-Bills reach quarterly highs?
13-week T-Bill auction held on June 9
There wasn’t much change in the three-month T-bill auction held on June 9 compared to the previous week. The auction amount and the high discount rate—at $25 billion and 0.035%, respectively—were the same as those recorded in the previous week’s auction. The high discount rate was the highest rate recorded this quarter, since the March 31 auction clocked in a high discount rate of 0.045%. The bid-to-cover ratio, however, was lower, at 4.96x compared to the 5.05x recorded in the June 2 auction. The June 2 auction recorded the highest bid-to-cover ratio among all three-month T-bill auctions held this year.
Primary dealers accounted for ~69.7% of the accepted competitive bids, up from ~58.8% in the previous week. Indirect bids as a percentage of competitive bids decreased from ~35.9% to ~26.6% from the previous week.
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26-week T-Bill auction held on June 9
The high discount rate came in at 0.06% for the $23 billion six-month T-bill auction, higher than the 0.055% recorded in the June 2 auction. This was the highest rate recorded this quarter, since the March 31 auction clocked in a high discount rate of 0.065%. The bid-to-cover ratio came in at 5.28x—higher than the 4.90x recorded the previous week. Primary dealers accounted for ~63.1% of the accepted competitive bids, compared to ~59.8% recorded in the previous week. Indirect bids as a percentage of competitive bids decreased to ~31.2% from ~35% from the previous week.
Higher demand for three-month and six-month maturities has obviously been a factor in increasing the discount rates to the highest in the current quarter, with the bid-cover ratio at healthy levels for both maturities.
ETFs that invest in T-bills include the SPDR Barclays 1–3 Month T-Bill ETF (BIL) and the PIMCO Enhanced Short Maturity Strategy Fund (MINT). Due to the Fed’s current dovish stance, rates at the short end of the yield curve are likely to remain low until at least Q2 2015, capping the return potential of T-bills. Monetary tightening—an increase in the Fed funds rate—is expected to commence some time between Q2 and Q4 2015.
At the June FOMC, the Fed is expected to release update forecasts for the economy as well as the Fed funds rate, which can have a significant effect of financial markets. To learn more about the impact of the Fed’s forecasts for the Fed funds rate on financial markets, please read the Market Realist article The Fed funds rate: Why the Fed’s “dots” moved markets.
In the following part of this series, we’ll analyze the implications of last week’s Treasury auctions on ETFs like the iShares Barclays 20+ Year Treasury Bond Fund (TLT), the iShares 7–10 Year Treasury Bond ETF (IEF), and the Vanguard S&P 500 ETF (VOO) as well as the impact of the Fed’s June FOMC meeting on financial markets. Please read on.