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Must-know: Why demand for 6-month T-bills moderated last week

Why the bond market gained last week across maturities (Part 4 of 4)

(Continued from Part 3)

The six-month T-bill auction of last week

Treasury bills (or T-bills) are short-term debt obligations issued by the U.S. government through a single-price auction, meaning all 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 $40 billion one-month (or four-week) T-bills auctioned on May 13 plus $25 billion three-month (or 13-week) and $23 billion six-month (or 26-week) T-bills auctioned on May 12.

We already discussed the one-month and three-month T-bill auctions in the previous parts of this series. We’ll cover the six-month T-bill auction in this part.

The moderation in demand for six-month Treasury bills continued from the previous week. The bid-to-cover ratio dropped to 4.95x for May 12 auction from 5.06x for the May 5 auction. Unlike the auctions for one- and three-month Treasury bills, the demand from indirect bidders actually fell for six-month T-bills. The moderation in demand for six-month T-bills may imply that investors are wary about tensions in emerging markets over the next one to three months but expecting the situation to normalize after that. The bid-to-cover ratio compares the number of bids received in a Treasury auction with the number of bids accepted (or the amount of securities issued). The higher the ratio, the greater the demand for the auctioned securities. A bid-to-cover ratio over two corresponds to a successful auction, while a ratio less than one shows an under-bought auction.

ETFs investing in T-bills are the Schwab Short-Term U.S. Treasury ETF (SCHO) and the Vanguard Short-Term Government Bond ETF (VGSH). Investors looking for short-term investment opportunities like T-bills but ready to take on 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, and mortgage-backed securities. The major holdings of MINT include JPMorgan Chase (JPM) and Citi (C).

To learn more about investing in fixed income securities, see Market Realist’s Fixed Income ETFs page.

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