Why the 26-week T-bills auction saw the lowest coverage in a year


Dec. 4 2020, Updated 10:53 a.m. ET

26-week T-bills auction

The US Department of the Treasury held the weekly 26-week, or six-month, Treasury bills (BIL) (MINT) (or T-bills) auction on November 10. T-bills worth $28 billion were on offer. This was $2 billion lower than the previous week. Despite the lower issuance, auction demand was lower.

The bid-to-cover ratio fell by ~8.6% to 3.8x week-over-week. This was the lowest ratio recorded since the weekly auction held on October 15, 2013. The ratio has averaged 4.7x for the auctions held in 2014.

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Yields analysis

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 November 10 auction came in at 0.06%. It didn’t change from the previous week. The discount rate averaged 0.05% in 3Q14.

Market demand slumps

Fundamental demand was much lower in last week’s auction. The percentage of indirect bids fell sharply from ~49% to 36.6% week-over-week. However, direct bids were higher. They increased to 5.6% from 3.4% week-over-week. Direct bids include domestic money managers—for example, Invesco (IVZ).

The share of primary dealer bids increased to ~57.8%—from ~47.7% the previous week. 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 obligated to bid at US Treasury auctions and clean up excess supply. They include firms like Goldman, Sachs and Co. (GS) and Citigroup Global Markets (C). C and GS are part of the SPDR S&P 500 ETF (SPY) and the SPDR Financial Select Sector ETF (XLF).

13-week T-bills auction

In the next part in this series, we’ll discuss the 13-week—or three-month—T-bills auction held last week.


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