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Bid-to-Cover Ratio Fell for 26-Week Treasury Bill Auction

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26-week Treasury bill auction

The U.S. Department of the Treasury held the weekly 26-week Treasury bill (or T-bill) auction on February 16, 2016. T-bills totaling $30 billion were on offer, the same amount as in the previous three weeks.

The bid-to-cover ratio tanked 11.1% from the previous week to 3.4x. In 2015, the bid-to-cover ratio has averaged 4.0x. The ratio depicts overall demand for the auction.

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Yield analysis

Treasury bills do not pay coupons. They are offered at a discount to face value. They are redeemable at par on maturity. The high discount rate for the February 16 auction came in at 0.41%—slightly lower than 0.42% in the previous week.

Market demand took a dive

Fundamental market demand nose-dived last week, from 62.6% a week prior to 41.0%. Accepted indirect bids fell to 34.9% week-over-week from 55.1% in the previous week. Indirect bids are bids from foreign central banks and depict international demand for the auction.

The percentage of direct bids nudged down to 6.1% week-over-week from 7.5% a week ago. Direct bids include bids from domestic money managers such as Wells Fargo (WFC) and State Street (STT).

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Due to lower market demand, the share of primary dealer bids surged to 59.0% of the auction from 37.4% 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 companies such as Goldman Sachs (GS) and Citigroup Global Markets (C). A rise in the percentage of primary dealer bids indicates weak fundamental market demand.

Investment impact

Mutual funds such as the MFS Government Securities Fund Class A (MFGSX) and the Prudential Government Income Fund Class A (PGVAX) invest in T-bills. MFGSX was flat while PGVAX was up by 0.12% last week.

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