Why demand for 6-month Treasury bills dropped last week

Last week’s Treasury auctions

We’ve discussed how the $25 billion one-month (or four-week) Treasury bills (or T-bills) auction and the $25 billion three-month (or 13-week) auction held on June 16 and 17, respectively, fared in the past week. Let’s move on to discussing the $23 billion six-month (or 26-week) T-bills auction that also took place on June 16. We’ll then move on to discussing June 19 auction of the $7 billion 30-year Treasury inflation-protected securities (or TIPS).

Why demand for 6-month Treasury bills dropped last week

Six-month T-bill auction results

The U.S. Treasury auctioned $23 billion in three-month T-bill issuance on June 16. The issuance amount for such six-month bills has remained constant over the last three months. Issuance has remained steady at $23 billion while the bid-to-cover ratio has shown a recent drop in the past week.

The demand (as reflected in the bid-to-cover ratio) for these bills fell this week because investors preferred longer-term securities due to inflation expectations. The bid-to-cover ratio for six-month T-bills slid from a high of 5.40x in the June 9 auction, to 4.87x 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 six-month bills

The drop in demand for 26-week T-bills could be attributed to investors’ fleeing the bond market given higher inflation expectations.

The demand for six-month T-bills was driven, to an extent by the indirect bidders who accounted for 34.7% of the total issuance for the June 16 auction. Primary dealers grabbed 59.37% of the total issue—slightly down from the 63.1% share in the week before. Since indirect bidders generally purchase T-bills to be held to maturity, their increase in share corresponds to increasing end-user demand for six-month T-bills.

Investors’ takeaway

Exchange-traded funds (or ETFs) investing in six-month T-bills are the Schwab Short-Term U.S. Treasury ETF (SCHO) 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.

Another Treasury auction that took place last week was the auction for the 30-Year Treasury inflation-protected securities (or TIPS). Continue reading the next section in this series to learn more about TIPS.