Why the 26-week T-bills auction sees lower market demand


Sep. 10 2014, Updated 12:00 p.m. ET

Treasury bill auctions in the week ending August 29

The U.S. Treasury held weekly auctions for three Treasury bill maturities—the four-week, 13-week, and 26-week Treasury bills (or T-bills) in the week ending August 29. A total of $103 billion worth of T-bills were auctioned. Treasury bills mature in a year or less. They’re at the very short end of the yield curve. Other Treasury securities like Treasury notes (UST) and bonds (TBT) are issued for longer maturities.

26-week—or six-month—Treasury bills auction held on August 25

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The U.S. Treasury auctioned six-month T-bills worth $24 billion on August 25—$1 billion lower than the previous week. Despite lower issuance, the bid-to-cover ratio fell by ~5% to 4.58x week-over-week. The ratio has averaged 4.81x in 2014. The bid-to-cover ratio is an important demand indicator. 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.

T-bills don’t pay a coupon. They’re offered at a discount to face value. They’re redeemable at par on maturity. The high discount rate for the August 25 auction came in at 0.05%—unchanged from the previous week. The discount rate averaged 0.053% in 2Q14.

Bidder demand

The auction saw market demand decrease sharply. Indirect bidder allotments decreased almost half to ~24%. The share of primary dealer bids in the August 29 auction increased to ~69% from ~48% the previous week. Direct bids increased to ~6%.

An increase 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. They’re obliged to bid at U.S. Treasury auctions. They clean up excess supply. They include firms like JPMorgan Securities LLC (or JPM) and Goldman, Sachs & Co. (or GS). Both firms are components of the S&P 500 Index (IVV).

Direct bids stem from domestic money managers like American Insurance Group (AIG) and State Street Corp. (STT). Indirect bids include demand from foreign governments and central banks.


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