Four-week (or one-month) Treasury bills auction
The U.S. Treasury auctioned one-month Treasury bills (BIL) (SHV) worth $33 billion on October 15. The auction was upsized compared to the previous week’s offering of $32 billion. Despite the auction size rising slightly, the bid-cover ratio slumped ~19.3% to ~3.7x, week-over-week. This was the lowest since the auction held on October 8, 2013. The ratio has averaged ~4.4x for auctions held in 2014.
T-bills don’t pay a coupon. They’re offered at a discount to face value and redeemable at par on maturity. The high discount rate for the October 15 auction came in at 0.015%. The high discount rate was 0.01% at the auction held the previous week. The rate has averaged 0.02% in 3Q14.
Bidder demand: Market demand falls sharply
The higher discount rate offered didn’t attract higher market demand for the securities, though. Market demand, consisting of both direct and indirect bids, fell to ~14.2% from ~36.7% of the competitive accepted bids, week-over-week. The decrease was due to both lower direct and indirect bidding at the auction.
The percentage of indirect bids fell from ~32.7% to ~10.5% week-over-week. Indirect bids are a measure of overseas demand because they include bids made by foreign sovereigns and central banks, and supranational and agency issuers.
The percentage of direct bids also fell from ~4.0% to ~3.7% of the competitive accepted bids, week-over-week. Direct bids include bids from domestic financial institutions and money managers.
Due to the lower market demand, primary-dealer uptake spiked to ~85.8% compared to ~63.3% the previous week. Primary dealers are a group of 22 financial broker and dealer firms. These firms are forced to bid at Treasury auctions and take up the excess supply of securities from the auction. Primary dealers include financial institutions such as JPMorgan Chase & Co. JPMorgan is part of the SPDR MSCI World Quality Mix ETF (QWLD) and the SPDR Financial Select Sector ETF (XLF).
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The next section will discuss the outlook for investment-grade bonds.