Why the 26-week Treasury bill auctions see higher market demand


Sep. 2 2014, Updated 9:00 a.m. ET

26-week Treasury bills auction held on August 18

The U.S. Department of the Treasury holds weekly auctions for 26-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.

Last week, the U.S. Treasury auctioned six-month T-bills worth $25 billion—the same as last week. The high discount rate came in at 0.05%—the same as last week. The discount rate averaged 0.053% in 2Q14.

Bid-to-cover ratio increases

The bid-to-cover ratio increased by ~2.3% to 4.83x week-over-week. The ratio has averaged 4.82x for all the auctions held in 2014. It’s 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.

The bid-to-cover ratio is an important demand indicator for the securities. A higher ratio implies higher demand and vice versa.

Market demand rises

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Market demand was strong at the auction. It was impacted by high demand from overseas bidders. The share of primary dealer bids in the August 18 auction fell to ~48%—compared to ~65% in the August 11 auction. Direct bids increased marginally to ~4% of the competitive accepted bids. The percentage of indirect bids increased to ~48% from ~32%.

A decrease in the percentage of primary dealer bids is a sign of weaker fundamental 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 like J.P. Morgan Securities LLC and Goldman Sachs & Co. Both financial firms are part of the S&P 500 Index (SPY).

While direct bids stem from domestic money managers like BlackRock (BLK) and Invesco (IVZ), indirect bids include demand from foreign governments and central banks.

You can invest in T-bills through the iShares Short Treasury Bond Fund. Exchange-traded funds like the iShares 7–10 Year Treasury Bond ETF (IEF) and iShares 1–3 Year Treasury Bond ETF (SHY) invest in longer-term Treasuries.



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