Why three-month Treasury bill demand fell in the past week
Last week’s Treasury auctions
The past week saw several Treasury auctions. We’ve discussed the auction results for the $25 billion one-month (or four-week) Treasury bills (or T-bills) auctioned on June 17. Now let’s move on to discuss how the $25 billion three-month (or 13-week) and the $23 billion six-month (or 26-week) auction fared on June 16. We’ll then move on to discuss the June 19 auction of $7 billion 30-year Treasury inflation-protected securities (or TIPS).
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Three-month T-bill auction results
The U.S. Treasury auctioned $25 billion in three-month T-bill issuance on June 16. The issuance amount for such three-month bills has remained constant since the beginning of the year. Issuance has remained steady at $25 billion while the bid-to-cover ratio has declined since the beginning of the month.
The demand (as reflected in the bid-to-cover ratio) for these bills fell this week, as investors preferred fixed-rate T-bills. Investors found the three-month T-bills less attractive in a rising rate environment. The bid-to-cover ratio for three-month T-bills slid from a high of 4.96x in the June 9 auction, to 4.47x in the June 16 auction.
The bid-to-cover ratio compares the number of bids received in a Treasury auction with the number of bids accepted (or the amount of securities issued). The higher the ratio, the greater the demand for the auctioned securities. A bid-to-cover ratio over two corresponds to a successful auction, while a ratio of less than one shows an under-bought auction.
Drop in demand for three-month bills
The drop in demand for 13-week T-bills could be attributed to investors’ fleeing the bond market given higher inflation expectations.
The demand for three-month T-bills was fueled by primary dealers, who accounted for 85.06% of the total issuance for the June 16 auction. Indirect bidders, including foreign banks and international authorities, grabbed 10.19% of the total issue—down from 26.62% the week before. As indirect bidders generally purchase T-bills to be held to maturity, their lower share corresponds to lower end-user demand.
Exchange-traded funds (or ETFs) investing in three-month T-bills are the SPDR Barclays Capital 1–3 Month T-Bill ETF (BIL) and the iShares Barclays Short Treasury Bond Fund (SHV). Investors can also invest in ETFs like the PIMCO Enhanced Short Maturity Exchange-Traded Fund (MINT), which also includes short-term corporate securities that offer higher returns for marginally higher risk. MINT invests in short-term securities such as T-bills, commercial papers, and mortgage-backed securities. A total of 70% of the fund’s assets are deployed in securities with maturity of less than a year. Goldman Sachs (GS) and Verizon Communication (VZ) form 2.7% of the total holdings of MINT.
To learn about the six-month T-bills auctions held on June 16, continue reading the next section in this series.