uploads/// Month Treasury Bill Issuance versus Bid Cover Ratio

Why Bid-to-Cover Ratio Jumped for 26-Week Treasury Bills Auction


Apr. 11 2016, Published 8:53 a.m. ET

26-week Treasury bills auction

The US Department of the Treasury held the weekly 26-week Treasury bills (or T-bills) auction on April 4. T-bills worth $24 billion were on offer, which was $2 billion lower than the previous auction.

The bid-to-cover ratio jumped 14.5% from the previous week to 4.1x on the April 4 auction, which was the second highest in 2016 so far. In 2015, the bid-to-cover ratio had averaged 4.0x. Fear of global economic slowdown resulted in demand for safe-haven Treasuries. Thus, demand for 26-week T-bills surged.

Mutual funds like the PIMCO GNMA Fund – Class A (PAGNX) and the Prudential Government Income Fund – Class A (PGVAX) provide exposure to T-bills.

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Yield analysis

Treasury 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 April 4 auction was lower at 0.39%, as compared to 0.48% in the previous week.

Market demand tanked

Fundamental market demand fell sharply from last week. Demand fell week-over-week to 39.4% of accepted competitive bids from 62.9% in the previous week.

Accepted indirect bids fell to 31.9% week-over-week from 57.5% in the previous week. Meanwhile, the percentage of direct bids rose to 7.4% week-over-week from 5.5% a week ago. Direct bids include bids from domestic money managers like Invesco (IVZ) and Wells Fargo (WFC).

Due to the fall in market demand, the share of primary dealer bids rose to 60.6% of the auction from 37.1% 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 firms like Goldman Sachs (GS) and Citigroup Global Markets (C).


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