Why investors are showing preference for high-grade bonds (Part 5 of 8)
Six-month Treasury bill auction
Last week, the U.S. Treasury held three auctions for ~$83 billion worth of Treasury bills. Auction amounts for the four-week, 13-week, and 26-week Treasury bills were $35 billion, $25 billion, and $23 billion, respectively. Demand for all three auctions was strong with the bid-to-cover ratios in excess of 4x for all three maturities. Demand for the six-month maturity was the strongest with the bid-to-cover ratio coming in at 4.93x. The bid-to-cover ratio is the total value of bids received divided by the value of securities on offer. The higher the ratio, the higher the demand for the securities on auction.
26-week or six-month Treasury bill auction held on July 14
The U.S. Treasury auctioned $23 billion worth of six-month Treasury bills (MINT) on July 14. The issue size for the six-month auction has been the same since the auction on March 10.
The high discount rate came in at 0.06%—the same as last week’s auction. The average discount rate for 1Q14 and 2Q14 was reported at 0.074% and 0.053%, respectively.
Key demand-side metrics
Bidding was relatively healthy in the six-month auction, with the bid-to-cover ratio increasing to 4.93x, compared to 4.86x reported in the July 7 auction. This was also the highest bid-to-cover ratio recorded since the June 9 auction.
A bid-cover ratio in excess of 4x is a sign of healthy demand. The average bid-to-cover ratio in 2Q14, came in at 4.96x, compared to 4.79x in June. The bid-to-cover ratio in the first half of 2014 averaged 4.82x.
The share of primary dealer bids in the July 14 auction increased to ~58%, compared to ~55% in the previous week’s auction. Indirect bidders represented a strong demand component, with the percentage of indirect bids increasing from ~35% to ~37% in the July 11 auction. The percentage of direct bids declined from ~10% to ~5% of the total issuance on a week-to-week basis.
Primary dealers are basically market makers, who clean up excess supply at Treasury auctions. A group of 22 primary dealers are authorized by the Fed, which include broker-dealers like Barclays Capital and Goldman Sachs (GS).
Takeaways from last week’s Treasury auctions
Indirect bids are a category that includes foreign central banks and sovereigns. As a result, indirect bids represent demand overseas. Geopolitical risks abroad, most recently in Gaza and 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 (TBF).
What are Treasury bills?
Treasury bills (or T-bills) are auctioned by the U.S. Treasury. T-bills include the securities that mature in less than a year. Currently, the U.S. Treasury holds auctions for four-week, 13-week, 26-week, and 52-week maturities. These securities are also known as the one-month, three-month, six-month, and one-year T-bills, respectively. The first three maturities are offered each week, while the 52-week T-bills are offered every four weeks. T-bills are offered at a discount to face value, the discount rate, and redeemable equal to maturity.
Popular exchange-traded funds (or ETFs) that invest in Treasury securities like T-bills are the SPDR Barclays 1–3 Month T-Bill ETF and the PIMCO Enhanced Short Maturity Strategy Fund (MINT).
Three-month Treasury bill auction
In the following section, we’ll analyze the key takeaways from the three-month Treasury bill auction held on July 14.
Browse this series on Market Realist: