Why did the 4-week rally in 6-month T-bill demand end last week?


Nov. 22 2019, Updated 6:51 a.m. ET

The six-month T-bill auction

Treasury bills (or T-bills) are short-term debt obligations issued by the U.S. government through a single-price auction, meaning all the competitive and non-competitive bidders are issued T-bills at a yield quoted by the lowest bidder. T-bills are quoted at a discount to face value.

Last week’s T-bill auctions included $25 billion one-month (or four-week) T-bills auctioned on April 15, plus $25 billion three-month (or 13-week) and $23 billion six-month (or 26 week) T-bills auctioned on April 14.

We’ve already discussed the one-month and three-month T-bill auction in the previous parts of this series. We’ll cover the six-month T-bill auction in this part of the series.

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This week saw the end of a four-week rally for six-month T-bills, as seen the in bid-to-cover ratio falling for the first time since March 17. The bid-to-cover ratio came in at 4.96x for the auction, compared to 5.35x (the highest in 2014) for the previous auction. However, demand still remains higher than it was at the beginning of March, when the bid-to-cover ratio was 4.46x. The discount rate remained unchanged, at 0.050%.

Investors looking for ETFs investing in T-bills can invest in the iShares Barclays 1-3 Year Treasury Bond Fund (SHY) or iShares Barclays Short Treasury Bond Fund (SHV). Investors looking for short-term investment opportunities like T-bills but ready to take on higher risk can invest in ETFs like PIMCO Enhanced Short Maturity Exchange-Traded Fund (MINT). The PIMCO Enhanced Short Maturity Exchange-Traded Fund (MINT) invests in short-term securities such as T-bills, commercial papers, mortgage-backed securities, et cetera. Of the fund’s assets, 70% are deployed in securities with a maturity of less than a year. Financial services firms like Goldman Sachs (GS) and JP Morgan Chase (JPM) regularly issue short-term securities to meet their short-term funding requirements. Investors looking at a short-term horizon may invest in those securities.

Conclusion from the T-bill auctions

While demand for one-month T-bill has remained intact, demand for longer-term T-bills has fallen on positive data. Even the higher discount hasn’t not been able to attract investors, as we can see in the case of the three-month T-bill, where the bid-to-cover ratio fell despite an increase in the discount rate.

Higher one-month T-bill demand means investors prefer to park their funds in safe havens like one-month T-bills due to factors like escalating tension in Ukraine. On the other hand, the drop in demand for three- and six-month T-bills suggests that investors expect the situation to normalize soon, giving rise to more attractive risk-adjusted investment opportunities than Treasuries over the next three to six months.

To find out more about last week’s investment-grade bond issuance, move on to the next part of this series.


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