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Fundamental Market Demand Rose for the 26-Week T-Bills Auction

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26-week T-bills auction

The U.S. Department of the Treasury held the weekly auction for 26-week Treasury bills, or T-bills, on April 18. T-bills worth $24 billion were on offer—the same as the previous week.

The bid-to-cover ratio rose marginally by 0.5% from the previous week to 3.9x. So far in 2016, the bid-to-cover ratio has averaged 4.0x. The ratio depicts the overall demand for the auction.

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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 April 18 auction came in at 0.35%—the same as the previous auction.

Market demand rose

Fundamental market demand was up last week. Accepted indirect bids rose to 42.7% week-over-week from 34.9% in the previous week. Indirect bids are bids from foreign central banks. They depict international demand for the auction.

Meanwhile, the percentage of direct bids fell to 6.0% week-over-week from 8.6% a week ago. Direct bids include bids from domestic money managers—for example, Wells Fargo (WFC) and State Street (STT).

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Due to higher market demand, the share of primary dealer bids fell to 51.3% of the auction from 56.6% 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 (C). A fall in the percentage of primary dealer bids indicates a rise in 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.

The week-over-week returns of MFGSX and PGVAX fell 0.5% each.

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