Why market demand for 13-week Treasury bills sees little change

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13-week Treasury bills auction held on July 21

The U.S. Treasury holds the auction for three-month Treasury bills (or T-bills) on a weekly basis. Last week, the U.S. Treasury auctioned three-month T-bills amounting to $26 billion on July 21. This was higher than the $25 billion auctioned in the previous week.

Part 6

Bid-to-cover ratio falls

Due to the higher issuance amount, demand for the bills was weaker, with the bid-to-cover ratio coming in at 4.65x, compared to 4.82x for the July 14 auction. The ratio has averaged 4.62x 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.

Direct bids increase

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The share of primary dealer bids in the July 21 auction increased marginally, coming in at ~67% of the total competitive bids. The percentage of direct bids increased from ~6% to ~7% of competitive bids on a week-over-week basis. The percentage of indirect bids declined to ~25% from ~27%, compared to the July 14 auction.

While direct bids stem from domestic money managers like BlackRock (BLK) and institutional investors like American International Group (AIG), indirect bids include demand from foreign governments and central banks.

Yields analysis

The high discount rate for the July 21 auction came in at 0.025%, the same as the July 14 auction. The discount rate has averaged 0.05% and 0.03% for 1Q14 and 2Q14, respectively.

Popular exchange-traded funds (or ETFs) that invest in Treasury securities like T-bills are the SPDR Barclays 1–3 Month T-Bill ETF, 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.

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