25 Jun

Why three-month Treasury bill demand fell in the past week

WRITTEN BY Surbhi Jain

Last week’s Treasury auctions

The past week saw several Treasury auctions. We’ve discussed the auction results for the $25 billion one-month (or four-week) Treasury bills (or T-bills) auctioned on June 17. Now let’s move on to discuss how the $25 billion three-month (or 13-week) and the $23 billion six-month (or 26-week) auction fared on June 16. We’ll then move on to discuss the June 19 auction of $7 billion 30-year Treasury inflation-protected securities (or TIPS).

Why three-month Treasury bill demand fell in the past week

Three-month T-bill auction results

The U.S. Treasury auctioned $25 billion in three-month T-bill issuance on June 16. The issuance amount for such three-month bills has remained constant since the beginning of the year. Issuance has remained steady at $25 billion while the bid-to-cover ratio has declined since the beginning of the month.

The demand (as reflected in the bid-to-cover ratio) for these bills fell this week, as investors preferred fixed-rate T-bills. Investors found the three-month T-bills less attractive in a rising rate environment. The bid-to-cover ratio for three-month T-bills slid from a high of 4.96x in the June 9 auction, to 4.47x in the June 16 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 of less than one shows an under-bought auction.

Drop in demand for three-month bills

The drop in demand for 13-week T-bills could be attributed to investors’ fleeing the bond market given higher inflation expectations.

The demand for three-month T-bills was fueled by primary dealers, who accounted for 85.06% of the total issuance for the June 16 auction. Indirect bidders, including foreign banks and international authorities, grabbed 10.19% of the total issue—down from 26.62% the week before. As indirect bidders generally purchase T-bills to be held to maturity, their lower share corresponds to lower end-user demand.

Investors’ takeaway

Exchange-traded funds (or ETFs) investing in three-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 maturity of less than a year. Goldman Sachs (GS) and Verizon Communication (VZ) form 2.7% of the total holdings of MINT.

To learn about the six-month T-bills auctions held on June 16, continue reading the next section in this series.

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