Why did the rally in demand for 1-month T-bills stop?


May. 2 2014, Updated 9:00 a.m. ET

Last week’s one-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 22, plus $25 billion three-month (or 13-week), and $23 billion six-month (or 26-week) T-bills auctioned on April 21.

Apart from T-bill auctions, last week also saw auctions for $32 billion two-year Treasury notes on April 22, $35 billion five-year Treasury notes on April 23, and $29 billion seven-year Treasury notes on April 24.

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Demand for one-month T-bill’s fell for the first time in eight weeks, as reflected in the bid-to-cover ratio falling to 4.83x for the April 22 auction compared to 5x for the April 15 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 2 corresponds to a successful auction, while a ratio less than 1 shows an under-bought auction. While the demand slowed moderately, the discount rate decreased to 0.015% last week compared to 0.025% for the week before, indicating aggressive bidding.

Although lower than the last week’s auction, the bid-to-cover ratio of 4.83x indicates solid demand for one-month T-bills.

Investors looking for ETFs investing in T-bills can invest in the SPDR Barclays Capital 1-3 Month T-Bill ETF (BIL) or iShares Barclays Short Treasury Bond Fund (SHV). Investors looking for short-term investment opportunities like T-bills but ready to take higher risk can invest in ETFs like the 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, and mortgage-backed securities. 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.

To find out about the auction of three-month T-bills held on April 21, move on to the next part of this series.


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