High Discount Rate Surges for the 13-Week Treasury Bills Auction



13-week Treasury bills auction

The US Treasury Department auctioned 13-week Treasury bills (or T-bills) worth $37 billion on February 1, 2016. The offer amount of these bills rose by $3 billion from the previous week.

Overall auction demand rose by 3.9% in the week, with the bid-to-cover ratio rising to 3.4x from 3.3x a week ago. The bid-to-cover ratio measures the overall demand for the auction.

Mutual funds such as the MassMutual Select Strategic Bond Fund Class A (MSBAX) and the MFS Government Securities Fund Class A (MFGSX) have exposure to T-bills.

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Yield analysis

T-bills don’t pay a coupon. They’re offered at a discount to face value. They’re redeemable at par on maturity. The high discount rate for the February 1 auction came in at 0.35%, which was the highest recorded in recent times and higher than 0.31% from the previous week.

Market demand rose

Market demand for 13-week Treasury bills rose to 40.7% from 36.2% in the previous week. The percentage of indirect bids rose to 33.5% of accepted bids, from 28.5% a week ago. Indirect bids depict demand from foreign governments.

Direct bids nudged down. These bids, which had formed 7.7% of accepted bids in the previous week, fell to 7.2%. Direct bidders include domestic money managers including State Street (STT) and Invesco (IVZ).

Due to a rise in overall market demand, the share of primary dealer bids fell to 59.3% from 63.8% in the previous week. Primary dealers are a group of 22 broker-dealers authorized by the Fed. They’re obligated to bid at US Treasury auctions and take up the excess supply. They include companies Goldman Sachs (GS) and Citigroup Global Markets (C). A fall in the percentage of primary dealer bids shows strong fundamental market demand.


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