Why the 52-week Treasury bill auctions see lower market demand


Jul. 29 2014, Updated 5:00 p.m. ET

U.S. Treasury bill auctions in the week ending July 25

The U.S. Treasury held weekly auctions for the four-week, 13-week, 26-week, and 52-week Treasury bills (or T-bills) for $35 billion, $26 billion, $24 billion, and $25 billion, respectively, in the week ending July 25. T-bills include the securities that mature in less than a year. T-bills are offered at a discount to face value, the discount rate, and redeemable at par on maturity.

In this section, we’ll discuss the highlights from the one-year, or 52-week, T-bill auction held on July 22. The auction for the one-year T-bill is held monthly, unlike the other three T-bill maturities, which are auctioned by the U.S. Treasury on a weekly basis.

52-month T-bill auction held on July 22

The U.S. Treasury auctioned one-year T-bills worth $25 billion on July 22—the same amount as in the previous week. Demand for the bills was higher though, at 4.27x, compared to 4.05x for the auction held the previous month on June 24. The ratio has averaged 4.49x for auctions held in 2014.

The bid-to-cover ratio is computed as the total value of bids received divided by the value of securities on offer. The higher the ratio, the higher the demand for the securities on auction.

Market demand comes in lower

The share of primary dealer bids in the July 22 auction increased to ~68%, compared to ~56% in the previous month’s auction. The percentage of direct bids was almost the same as last month at ~3%. The percentage of indirect bids declined to ~29% from ~40%, compared to the June 24 auction.

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An increase in the percentage of primary dealer bids implies lower underlying market demand. Primary dealers are a group of 22 authorized broker-dealers who are obliged to bid at U.S. Treasury auctions and clean up excess supply. They include firms such as JPMorgan Securities LLC and Goldman Sachs and Co. (GS). Both financial firms are part of the S&P 500 Index (IVV).

Yields analysis

The high discount rate for the July 22 auction came in at 0.11%—the same as the June 24 auction. The discount rate for 2Q14 averaged 0.108%—lower than the 0.12% in the 1Q14.

Popular exchange-traded funds (or ETFs) that invest in Treasury securities like T-bills include the iShares Short Treasury Bond Fund and the PIMCO Enhanced Short Maturity Strategy Fund. Others like the iShares 10–20 Year Treasury Bond (TLH) and the iShares Barclays 20+ Year Treasury Bond Fund (TLT) and the ProShares Ultra 7–10 Year Treasury ETF (UST) invest in long-term Treasuries.

26-week Treasury bills auction

In the following section, you’ll find details of the 26-week or six-month T-bill auction held last week. Please continue reading the next section in this series.



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