Indirect Bidders Drive Down Demand for 26-Week Treasury Bills

The US Department of the Treasury held the weekly 26-week Treasury bills (or T-bills) auction on August 3. T-bills worth $24 billion were on offer, the same as in the previous week. The US Treasury Department has auctioned the same quantum of these T-bills since the March 23 auction.

The bid-to-cover ratio fell by 2.5% from the previous week to 3.9x. In 2015 so far, the bid-to-cover ratio has averaged 4.2x. The bid-to-cover ratio depicts overall demand for the auction.

Treasury 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 3 auction came in at 0.165%, higher than 0.145% in the previous week.

After a jump in demand in the previous week, fundamental market demand fell last week with the quantum of accepted indirect bids falling and direct bids rising. Accepted indirect bids fell to 31.6% week-over-week from 47.5% in the previous week.

Meanwhile, the percentage of direct bids rose to 7.9% week-over-week from 4.4% a week ago. Direct bids include bids from domestic money managers like Invesco (IVZ).

Due to lower market demand, the share of primary dealer bids rose to 60.5% of the auction from 48.1% in the previous week. Primary dealers are a group of 22 authorized broker-dealers. They’re obligated to bid at US Treasury auctions and take up excess supply. They include firms like Goldman, Sachs and Co. (GS), and Citigroup Global Markets (C). A rise in the percentage of primary dealer bids is a sign of weak fundamental market demand.

Mutual funds such as the MFS Government Securities A (MFGSX) and the Prudential Government Income A (PGVAX) invest almost 9% of their assets in T-bills. The MFGSX provided a weekly return of 0.15% while the week-over-week return of the PGVAX came in at 0.02%.