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 three-month (or 13-week) and $23 billion six-month (or 26-week) T-bills auctioned on May 27 along with $45 billion one-month (or four-week) and $25 billion one-year (or 52-week) T-bills auctioned on auctioned on May 28.
While four-week T-bills saw a drop in demand in the last week (as we discussed in the previous part of this series), three-month, six-month, and one-year T-bills saw an increase in demand, as reflected in the increase in the bid-to-cover ratios for these auctions.
Three-month, six-month, and one-year T-bill auction results
Demand for these short-term T-bills increased, as reflected by the increase in bid-to-cover ratios for at each of these auctions. The bid-to-cover ratio for three-month T-bill rose from 4.82x to 4.89x and for six-month T-bills rose from 5.05x to 5.13x from the May 19 auction to the May 27 auction. The bid-to-cover ratio for one-year T-bills rose from 4.50x at the April 29 auction to 4.56x at the May 28 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 less than one shows an under-bought auction.
Demand for three-month T-bills was fueled by indirect bidders, who accounted for 35.9% of the total issuance for the May 27 auction compared to 29.25% for the May 19 auction. On the other hand, the demand for six-month T-bills was driven by primary dealers, who accounted for close to 60% of the issuance. One-year bills also saw demand being fueled by an increased number of indirect bidders, who accounted for 35.61% of the issuance at the May auction as compared to 29.8% at the April auction.
ETFs investing in one-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 a maturity of less than a year. Goldman Sachs (GS) and Verizon Communication (VZ) form 2.7% of the total holdings of MINT.
The demand for Treasury securities increased across the farther end of the Treasury yield curve. The bid-to-cover ratio for two-year notes increased while demand for five-year notes remained almost stable for the past week, as we’ll discuss in the next part of this series.