Bid-to-cover ratio strong for 4-week T-bills despite high supply

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Dec. 4 2020, Updated 10:53 a.m. ET

Four-week Treasury bills auction held on August 19

The U.S. Department of the Treasury holds weekly auctions for four-week Treasury bills (or T-bills). T-bills don’t pay a coupon. They’re offered at a discount to face value—the discount rate. They’re redeemable at par on maturity.

Auction sees higher market demand

For the August 19 auction, the U.S. Treasury auctioned one-month T-bills worth $50 billion—unchanged from last week. The high discount rate for the auction came in at 0.035%—down from 0.04% the previous week. Demand for the bills was stronger—the bid-to-cover ratio came in at 3.86x—compared to 3.73x last week. The ratio has averaged 4.37x for auctions held in 2014.

The bid-to-cover ratio is an important demand indicator for the securities. It’s the total value of bids received divided by the value of securities on offer. A higher ratio implies higher demand and vice versa.

The decline in the bid-to-cover ratio in recent weeks is due to a higher supply at the auction.

The share of primary dealer bids in the August 19 auction decreased to ~69% of the total competitive bids from ~74% the previous week. Indirect bids increased to ~22% from ~20% because of higher overseas demand. A higher amount was also given to direct bidders.

While direct bids stem from domestic money managers like BlackRock (BLK) and Invesco (IVZ), indirect bids include demand from foreign governments and central banks. Both BLK and IVZ are part of the S&P 500 Index (SPY).

The iShares Short Treasury Bond Fund invests primarily in T-bills. Exchange-traded funds (or ETFs) like the Vanguard Total Bond Market ETF (BND) and the ProShares Ultra 7–10 Year Treasury ETF (UST) invest in longer-term Treasuries.

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