Why demand for three-month Treasury bills reached a high for 2014
Analyzing the key drivers for recent Treasury bill auctions
Last week, the U.S. Treasury held three auctions for ~$83 billion worth of Treasury bills (or T-bills). Auction amounts for the four-week, 13-week, and 26-week Treasury bills were $35 billion, $25 billion, and $23 billion respectively. Demand for all three auctions was strong with the bid-cover ratios in excess of 4x for all three maturities. Demand for the 13-week maturity was particularly strong with the bid-cover ratio coming in at 5.05x. The bid-cover ratio is the total value of bids received divided by the value of securities on offer. The higher the ratio, the higher the demand for the securities on auction.
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Four-week T-Bill auction sees drop in the high discount rate
The four-week T-bill auction was held on June 3. The high discount rate came in at 0.035%, lower than last week’s 0.04%. Demand for the $35 billion offering was high, judging by the bid-cover ratio, which came in at 4.38x. Last week’s bid-cover ratio at 4.38x, was higher than the 3.77x clocked in the previous week’s auction. However, the auction offering last week was also smaller at $35 billion compared to $45 billion the previous week, which boosted the bid-cover ratio.
Primary dealers accounted for ~74.8% of the accepted bids, an increase from the 68.4% in the previous week. The percentage of indirect bids declined from 19.7% to 18.1%, over the previous week. Indirect bids include bids from foreign governments and international monetary authorities, who place bids via a direct submitter, who places the bids on their behalf with the New York Fed.
Primary dealers are authorized securities firms or banks like Morgan Stanley (MS) who are required to make competitive bids at U.S. Treasury auctions and who trade in these securities with the Federal Reserve Bank of New York in order to implement monetary policy. Currently, there are 22 authorized primary dealers.
13-week T-Bill auction sees healthy demand from indirect bidders
The $25 billion 13-week T-bill auction was held on June 2. The high discount rate came in at 0.035%, higher than the 0.03% recorded in the previous week. The bid-cover ratio, which came in at 5.05x, is the highest this year, along with the auction held on May 12. Last week’s bid-cover ratio came in at 4.93x. Primary dealers accounted for ~57.4% of the accepted bids, declining from the 64.1% in the previous week. The percentage of indirect bids increased from 28% to ~35%, over the previous week. This is a good sign as indirect bidders are generally the end users who generally hold the Treasuries for a longer time than primary dealers whose primary function is to act as market makers.
26-week T-Bill auction sees an increase in the high discount rat
The $23 billion 26-week T-bill auction was also held on June 2. The high discount rate came in at 0.055%, higher than the 0.05% recorded in the previous week. The bid-cover ratio came in at 4.9x, lower than the 5.19x recorded the previous week. Primary dealers accounted for ~58.1% of the accepted bids, an increase from the 51.4% recorded in the previous week. The percentage of indirect bids decreased from 40% to ~34%, over the previous week.
What are Treasury bills?
T-bills are auctioned by the U.S. Treasury and include those securities which mature in less than a year. Currently, the U.S. Treasury holds auctions for four-week, 13-week, 26-week, and 52-week maturities. These securities are also known as the one-month, three-month, six-month and one-year T-bills, respectively. The first three maturities are offered each week, while the 52-week T-bills are offered every four weeks. T-bills are offered at a discount to face value (the discount rate) and redeemable at par on maturity.
ETFs that invest in T-bills are the SPDR Barclays 1–3 Month T-Bill ETF (BIL) and the PIMCO Enhanced Short Maturity Strategy Fund (MINT). The Fed has indicated in its April Federal Open Market Committee (or FOMC) statement that the base rate would be likely to stay low for a considerable period after employment and inflation were near mandate-consistent levels. For this reason, Treasury yields at the short end of the yield curve have seen little movement over the past few years, unlike longer maturities. 30-year Treasury yields (TLT) increased by 92 basis points in 2013 to 3.96% on December 31, 2013, which benefited inverse ETFs like the Pro-Shares Short 20+ Year Treasury ETF (TBF).
To learn more about the auction process for Treasury securities, please read the Market Realist series, An investor’s must-know guide to auctions for Treasury securities.
In the next section, we’ll analyze the key trends seen in the high-yield bond market for the week ending June 6. Please read on.