Why demand increased for the 3-month Treasury bills auction

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13-week U.S. Treasury bills auction held on October 6

The U.S. Treasury auctioned $24 billion worth of three-month Treasury bills (or T-bills) (SHV) (BIL) last week. This was the same as the issue size auctioned in the previous week. The high discount rate was also the same at 0.015%. The discount rate averaged 0.027% for 3Q14—compared to 0.03% in 2Q14.

Part 11

Key demand-side trends

Bidding was strong at the October 6 auction. The bid-to-cover ratio increased 21.1% to 5.1x—from 4.2x at the previous week’s auction. The ratio averaged 4.6x for all auctions held in 2014.

Domestic market demand lower

Market demand for the three-month T-bills increased to ~24.3% of the competitive accepted bids. This was a result of higher bidding from indirect bidders. The latter made up 20.1% of the competitive accepted bids. This was up from 11.6% the previous week.

However, direct bids were lower at 4.2%—compared to 6.8% in the previous week. Indirect bids are a measure of overseas demand. They include bids made by foreign sovereigns and central banks. They also include bids made by supranational and agency issuers.

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As a result, primary dealer uptake was lower. The percentage of bids fell to ~75.7%—compared to 81.7% in the previous week. Primary dealers are a group of 22 financial broker or dealer firms. They act as market makers at Treasury auctions. They clean up excess supply—relative to demand—for the securities on auction. They include financial institutions like Citigroup (C). Citigroup is part of the S&P 500 Index (SPY). It’s also part of exchange-traded funds (or ETFs) like the SPDR Financial Select Sector ETF (XLF).

One-month T-bill auction

In the next part of the series, we’ll analyze the key takeaways from the one-month T-bill auction held on October 7.

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