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Why is the spread between 3-month and 1-month T-bills reducing?

Why didn't demand for Treasury notes and bonds rise much? (Part 5 of 8)

(Continued from Part 4)

A converging trend between three-month and one-month T-bill yields

Treasury bills (or T-bills) are short-term debt obligations issued by the U.S. government through a single-price auction, meaning all the competitive and non-competitive bidders are issued T-bills at a yield quoted by the lowest bidder. T-bills are quoted at a discount to face value.

Last week’s T-bill auctions included $25 billion one-month (or four-week) T-bills auctioned on April 8, plus $25 billion three-month (or 13-week) and $23 billion six-month (or 26-week) T-bills auctioned on April 7. We already discussed the one-month T-bill auction in the previous part of this series. We’ll cover the three-month T-bill the auction in this part of the series.

Last week’s three-month T-bill auction saw greater response, as reflected in the bid-to-cover ratio increasing marginally to 4.88x from 4.83x for the auction held on March 31. The issuance remained at $25 billion. However, the high discount rate dropped sharply, to 0.03% from 0.045%, indicating aggressive bidding.

Last week’s auctions saw a converging trend in one-month and three-month T-bills, as the one-month high discount rate increased while the discount rate for the three-month T-bill dropped, reducing the spread between the yields of these two securities. The reducing spread indicates the shift in investor preference and investors becoming indifferent while choosing between one-month and three-month T-bills.

Investors looking for ETFs investing in T-bills can invest in the SPDR Barclays Capital 1-3 Month T-Bill ETF (BIL) or the iShares Barclays Short Treasury Bond Fund (SHV). Investors looking for short-term investment opportunities like T-bills but ready to take higher risk can invest in ETFs like the PIMCO Enhanced Short Maturity Exchange-Traded Fund (MINT). The PIMCO Enhanced Short Maturity Exchange-Traded Fund (MINT) invests in short-term securities such as T-bills, commercial papers, mortgage-backed securities, et cetera. Of the fund’s assets, 70% are deployed in securities with maturity of less than a year. Financial services firms like Goldman Sachs (GS) and JP Morgan Chase (JPM) regularly issue short-term securities to meet their short-term funding requirements. Investors looking at a short-term horizon may invest in those securities to park their cash for the short term in safer securities.

To find out about the auction for six-month T-bills held on April 7, read on to the next part of this series.

Continue to Part 6

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