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Indirect Bidders Flock to the 26-Week Treasury Bills Auction

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26-week Treasury bills auction

The US Department of the Treasury held the weekly 26-week Treasury bills, or T-bills, auction on November 2. T-bills worth $26 billion were on offer, the same amount offered 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 rose to 3.8x last week, compared with 3.3x in the previous week. In 2015 so far, the bid-to-cover ratio has averaged 4.0x.

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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 November 2 auction came in at 0.28%, higher than 0.16% in the previous week.

Market demand surged

Fundamental market demand surged last week from 32.5% to 65.4% due to a rise in the percentage share of indirect bidders. Indirect bids jumped from 28.1% to 62.8% week-over-week. Indirect bidders include foreign central banks.

The percentage of direct bids was down from 4.4% to 2.5% week-over-week. Direct bids include domestic money managers such as Invesco (IVZ).

Consequently, the share of primary dealer bids dived from 67.5% to 34.7% that week. A fall in the percentage of primary dealer bids is a sign of strong fundamental market demand. Primary dealers are a group of 22 authorized broker-dealers. They are obligated to bid at Treasury auctions and take up excess supply. They include companies such as Goldman, Sachs and Co. (GS) and Citigroup Global Markets (C).

Investment impact

Mutual funds such as the Vanguard GNMA Fund Investor Shares (VFIIX) and the PIMCO GNMA Fund – Class A (PAGNX) invest in T-bills. VFIIX’s week-over-week return fell by 0.34% while PAGNX’s was down by 0.41%.

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