Must-know: An investment-grade bond update (Part 7 of 8)
Six-month T-bill sees lowest demand since February
The last 26-week Treasury bill (MINT) auction for 2Q14, was held on June 30. The U.S. Treasury auctioned $23 billion worth of T-bills (BIL) on June 30. The issue size was the same at $23 billion in all auctions held in the 2Q14.
The high discount rate was higher at 0.065% in the June 30 auction, compared to 0.05% in the auction held the previous week. The average discount rate for 2Q14 was reported at 0.053%, lower than the 0.074% in the 1Q14.
Key demand-side metrics
Although the bidding was relatively healthy in the six-month auction, the bid-cover ratio declined to a quarterly low of 4.41x, compared to 4.60x reported in the June 23 auction. This was also the lowest bid-cover ratio recorded since the February 18 auction. Although a bid-cover ratio in excess of 4x is a sign of healthy demand, the last three weeks have seen a downtrend in the ratio, which have pulled down averages for June. The average bid-cover ratio in 2Q14, came in at 4.96x, compared to 4.79x in June. The bid-cover ratio in the first half of 2014 averaged 4.82x.
The share of primary dealer bids in the June 30 auction increased to ~57%, compared to ~53% in the previous week’s auction. Indirect bidders again represented a strong demand component, with the percentage of indirect bids increasing from ~33% to ~38% in the June 30 auction. The percentage of direct bids declined from ~14% to ~4% of the total issuance on a week-to-week basis.
Takeaways from last week’s Treasury auctions
Indirect bids are representative of overseas demand. Geopolitical risks abroad, most recently in Iraq, increased the demand for safe-haven assets like U.S. Treasuries (SHY) across the yield curve ranging from short-term T-bills to intermediate-term Treasuries (IEI), and also, longer-term 30-year Treasury bonds (TLT).
However, with many market participants believing that a rate hike may come in earlier than expected, domestic market demand for T-bills fell in last week’s three-month and six-month auctions.
Yield curve impact
In the next section, we’ll analyze the impact of last week’s market trends on the yield curve. Please continue reading the next section in this series.
Browse this series on Market Realist:
- Part 1 - Investment-grade bond update: Momentum shifts and deals dominate
- Part 2 - Why the June issuance is second highest in the 2014 bonds review
- Part 3 - Why JPMorgan topped the US bond underwriter rankings in 1Q14