24 Jun

Why demand for 6-month Treasury bills dropped last week

WRITTEN BY Surbhi Jain

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.

Latest articles

US crude oil production has more than doubled since 2009 and grew by 1.1% over the last year. Currently, there are 133 operable refineries in the US.

The cannabis industry is fighting against the ongoing US-China trade war and recessionary worries, which have hurt valuations across the global market.

Higher revenues, increased ticket prices, and lower fuel costs are likely to drive American Airlines' Q3 earnings higher despite its Boeing MAX woes.

HEXO plans to report its Q4 earnings before the market opens on October 24. October has been tough for Hexo, with its stock falling 31.2% as of October 18.

Today, Advanced Micro Devices (AMD) rose 4% to over $32, making it one of the top Nasdaq gainers. Morgan Stanley raised its price target for AMD stock.

Early in 2019, President Donald Trump warned that China could overtake the US as a global power. He vowed that this would not happen under his leadership.