Direct Bidders Return to the 26-week Treasury Bills Auction



26-week Treasury bills auction

The US Department of the Treasury held its weekly 26-week Treasury bills (or T-bills) auction on September 21. The Treasury offered $20 billion in T-bills—the same as in the previous week.

The bid-to-cover ratio measures the overall demand for the auction. The higher the ratio, the higher the demand, and vice versa. The bid-to-cover ratio fell to 3.86x last week, compared to 3.99x in the previous week. So far in 2015, the bid-to-cover ratio has averaged 4.08x.

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Yield analysis

Treasury bills do not pay a coupon. They are offered at a discount to face value and are redeemable at par on maturity. The high discount rate for the September 21 auction came in at 0.115%—lower than 0.260% in the previous week.

Market demand fell

Fundamental market demand dropped last week from 51.2% to 41.2% from the previous week due to a fall in the percentage of indirect bidders. Indirect bids tanked from 49.5% to 26.8% week-over-week. Indirect bidders include foreign central banks.

The percentage of direct bids jumped from 2.3% to 14.5% week-over-week. Direct bidder include domestic money managers such as Invesco (IVZ).

Consequently, the share of primary dealer bids rose from 48.2% to 58.8% in the week. A rise in the percentage of primary dealer bids is a sign of weak fundamental market demand. Primary dealers are a group of 22 authorized broker-dealers. They are obligated to bid at US Treasury auctions and take up excess supply. They include firms such as Goldman, Sachs and Co. (GS) and Citigroup Global Markets (C).

Investment impact

Mutual funds such as the Prudential Government Income A (PGVAX) and the Pimco GNMA A (PAGNX) invest in T-bills.

The week-over-week return of PGVAX fell by 0.19% while that of the PAGNX fell by 0.23%.


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