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The Sharp Fall in Market Demand for 26-Week Treasury Bills

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26-week Treasury bills auction

The US Department of the Treasury held its weekly 26-week T-bills (Treasury bills) auction on October 5. T-bills worth $21 billion were on offer—$3 billion higher than the previous week.

The bid-to-cover ratio was up by 6.0% from the previous week to 3.9x. In 2015 so far, the bid-to-cover ratio has averaged 4.1x.

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Yield analysis

Treasury bills don’t pay a coupon. They’re offered at a discount to face value and are redeemable at par on maturity. The high discount rate for the October 5 auction fell, coming in at 0.065%—lower than 0.105% in the previous week.

Market demand

Fundamental market demand fell sharply from the prior week. Accepted indirect bids fell to 31.3% from 50.0% in the previous week. Meanwhile, the percentage of direct bids rose slightly to 6.4% from 5.8% one week prior. Direct bids include bids from domestic money managers like Invesco Mortgage Capital (IVZ).

Due to this decline in market demand, the share of primary dealer bids rose to 62.3% of the auction from 44.2% in the previous week. Primary dealers are a group of 22 authorized broker-dealers who are obligated to bid at US Treasury auctions and take up excess supply. They include firms like Goldman Sachs (GS) and Citigroup (C). A rise in the percentage of primary dealer bids is a sign of weak fundamental market demand.

Investment impact

MFs (mutual funds) like the T. Rowe Price GNMA Fund (PRGMX) and the Prudential Government Income Fund Class A (PGVAX) provide exposure to T-bills. The weekly returns of PRGMX and PGVAX were down by -0.15% and -0.5%, respectively.

Read the next part of this series for a look at the results of the 13-week Treasury bills auction on October 5, 2015.

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