Why the 52-week Treasury bill auctions see lower demand


Sep. 1 2014, Updated 5:00 p.m. ET

52-week Treasury bill auctions see lower demand

Treasury bills (or T-bills) include securities that mature in less than a year. T-bills are offered at a discount to face value—the discount rate. They’re redeemable at par on maturity. The U.S. Treasury auctioned $129 billion worth of T-bills last week. Besides the weekly auctions for the four-week, 13-week, and 26-week Treasury bills—the monthly 52-week T-bill auction was also held.

You can invest in T-bills through the PIMCO Enhanced Short Maturity Strategy Fund. Exchange-traded funds (or ETFs) like the iShares Barclays 20+ Year Treasury Bond Fund (TLT) and the ProShares UltraShort 20+ Year Treasury ETF (TBT) invest in longer-term Treasuries.

52-week Treasury bills auction held on August 19

The U.S. Treasury auctioned 52-week Treasury bills worth $25 billion on August 19—unchanged from last month. Despite the same auction amount, the bid-to-cover ratio decreased by ~4% to 4.10x. The ratio has averaged 4.45x for all 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.

Market demand rises

The share of primary dealer bids in the August 19 auction decreased to ~60%—compared to ~68% last month. While the ratio of direct bids decreased slightly, the percentage of indirect bids increased to ~37% from ~29% month-over-month.

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A decrease in the percentage of primary dealer bids is a sign of stronger fundamental demand. Primary dealers are a group of 22 authorized broker-dealers. They’re 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 State Street Corp. (STT) 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 August auction was lower at 0.105%—compared to 0.11% in July. Due to their very short-term nature, these securities aren’t impacted much by future rate increase forecasts.


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