Auctioned every week, the Treasury bills (T-bills) are short-term debt obligations backed by the U.S. government. T-bills are issued through a competitive bidding process at a discount or at par (face value). Based on the investor’s demand for the bill, interest rates are determined at the auction.
Last week, the U.S. 52-week T-bill saw its highest investor demand since 2008 periods. The auction was very strong at 4.85x bid/cover ratio for $25 billion issuance compared to the previous week’s auction of $18.0 billion at 3.70x bid/cover ratio.
What does the situation imply?
Among all the short-term T-bills, demand for the 12-month T-bill was relatively high as seen in the chart above. The bid/cover ratio was 4.85x, highest since the beginning of the year 2014 and in last six years.
The 12-month T-bill rates have increased to 0.11% to 0.12% last week, but still lower than the issuance for month of June and July 2012 at 0.19% to 0.20%. The 12-month T-bill rates are a popular index for making changes in the adjustable mortgage rate. Higher interest rates imply that the adjustable mortgage rate would increase, which is not good for the borrowers, as cost of borrowings increases. Borrowers have to pay high interest rates on their mortgages than what they could have paid in the fixed-rate mortgages. Other things being constant, increase in the adjustable mortgages rate could impact the consumer spending, but if the housing prices continue to rise, then there is a greater incentive for investors to spend.
There are many ETFs available in the market tracking one–three year or above performance of the U.S. Treasury bill market. Some of them include iShares 1-3 Year Treasury Bond (SHY), 1-5 Years U.S. TIPS Index Fund (STPZ), and iShares 1-3 Year International Treasury Bond (ISHG). The profiles of these ETFs and the movements in the ETF fund flows are discussed below. Fund flows can be used to assess the investor demand in the market.
The iShares 1-3 Year Treasury Bond (SHY) seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Barclays U.S. 1-3 Year Treasury Bond Index. The index reported a fund outflow of $110.23 million last week. The one-month fund flow is a negative $231.6 million.
The iShares 1-3 Year International Treasury Bond (ISHG) seeks to track the investment results of an index composed of non-U.S. developed market government bonds with remaining maturities between one and three years. The fund seeks to track the investment results of the S&P/Citigroup International Treasury Bond Index Ex-US 1-3 Year and is a broad, diverse, market value-weighted index designed to measure the performance of bonds denominated in local currencies and issued by foreign governments in developed market countries outside the U.S. that have a remaining maturity of greater than one year and less than or equal to three years. The index reported a fund inflow of $0.38million last week. The one-month fund flow was positive at $0.95 million.
SPDR Barclays Intermediate Term Treasury (ITE) seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of an index that tracks the one–ten year sector of the U.S. Treasury market. The index reported a fund outflow of $0.70 million last week. The one-month fund flow was positive at $2.49 million.