Why demand for Treasuries is on the rise despite falling rates



Demand for Treasuries is on the rise

Last week (ended February 27, 2014), a range of short-term and long-term U.S. Treasury bills and notes worth $194 billion was issued at auction. Long-term Treasury notes such as two-year and seven-year notes (IEI) showed very strong coverage on last week’s auction, while very-short-term Treasury bills—mainly the four-week bill—were slightly down compared to the previous week, as historically suppressed short-term interest rates had little to offer investors. A considerable $35 billion was offered for the weekly four-week T-bill auctioned on Tuesday, February 25, 2014, at $1,000 face value. The bill was issued at 0.035% discount rate. At the maturity date (28 days from the date of issue), the bill will earn a premium of $0.03 on its purchase price. The bid-to-coverage ratio was 4.05—down from 4.48 for last week’s $32 billion offering, and the lowest of the quarter. Meanwhile, the T-bill auctions for three-month and six-month bills at 4.96 and 4.76 bid-to-coverage ratios, respectively, showed higher investor demand.

US Treasury Issuance- Feb 27, 2014

What is a bid-to-cover ratio?

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This is a ratio that compares the number of bids received in a Treasury security auction to the number of bids accepted. The bid-to-cover ratio is an indicator of the strength or demand for a Treasury offering relative to investor bids deemed suitable in the auction process. A higher ratio is an indication of a strong auction, marked by a tight bid-ask spread. On the other hand, a low ratio is an indication of a disappointing auction, marked by a wide bid-ask spread.

Demand for Treasury notes (TLT) was higher last week. Both the State Street Investor Confidence Index and Consumer Confidence Index posted strong institutional investor sentiments despite the decline in retail sales, which could have an adverse impact on the margins of big retailers such as Wal-Mart Stores, Inc. (WMT) and Best Buy Co., Inc. (BBY). A $32 billion offering of two-year notes auctioned at coverage of 3.60 was well up from the 3.30 in January’s auction. The two-year floating rate note auction came in at a 5.29 coverage ratio. Results were very strong for the monthly five-year note auction, where coverage of 2.98 was the highest since September 2012. The seven-year note auction last week pointed to tight bidding, as demand in the primary dealer front remained strong. (There are about 20 primary dealers that participate in the auction, through which most institutional investors access the U.S. Treasury market). Coverage for seven-year notes was 2.72—up from 2.62 in the last month’s seven-year auction.

How Treasury bills and notes work

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Treasury bills are short-term securities maturing in one year or less sold at public auctions every week. Bills are sold at a discount or at par (face value). When a bill matures, the investor receives the face value. The difference between the purchase price and the face value equals the interest earned.

  • Four-week bills are normally auctioned on Tuesdays.
  • Three-month bills are also known as 13-week and six-month bills (26-week bills), and they’re normally auctioned on Mondays.
  • Fifty-two-week bills are normally auctioned on Tuesdays every four weeks.

A group of securities dealers, known as “primary dealers,” is authorized and obligated to submit competitive tenders at Treasury auctions. Dealers can hold the bills, resell the bills to their clients, or trade them with other securities firms. Typically, the New York Fed approves about 20 securities firms to be primary dealers, but that number dropped sharply during the recent financial crisis, as some merged into other firms or went bankrupt.

Treasury securities, referred to as “T-notes” and “T-bonds,” are normally available in maturities ranging from two to 30 years (two-, three-, five-, seven-, and ten-year notes are most common).

How notes work

Investors pay $1,000 for a note and receive interest payments every six months based on the coupon rate. If the rate is 6%, investors get $30 every six months for a total of $60 per year. When the note matures (maturity dates can range from two years to 30 years), investors get the original investment of $1,000, called the “principal value.”


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