26-week Treasury bills auction
The U.S. Department of the Treasury held its weekly auction of 26-week Treasury bills (or T-bills) on February 22, 2016. T-bills worth $30 billion were on offer, unchanged for the fourth successive 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 to 3.4x in the previous week. In 2015, the bid-to-cover ratio averaged 4.0x.
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 February 22 auction came in at 0.42%, higher than 0.37% in the previous week.
Market demand rose sharply
Fundamental market demand rose sharply last week, from 41.0% the week before to 68.3%. This was due to a rise in the percentage share of indirect bidders. Indirect bids rose from 34.9% to 60.0% week-over-week. Indirect bidders include foreign central banks. The percentage of direct bids fell from 6.1% to 3.9% week-over-week. Direct bids include domestic money managers such as Invesco (IVZ) and State Street (STT).
Consequently, the share of primary dealer bids fell from 59.0% to 36.2% in the 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’re obligated to bid at U.S. Treasury auctions and take up excess supply. They include firms such as Goldman Sachs (GS) and Citigroup (C).