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Treasury securities’ lower allotment to primary dealers is good

Mayur Sontakke

Must-know update: Why did the demand for T-bills fall last week? (Part 5 of 6)

(Continued from Part 4)

Last week’s ten-year Treasury note auction 

Last week’s Treasury auctions included $35 billion one-month (or four-week) T-bills auctioned on May 6; plus, $25 billion three-month (or 13-week) and $23 billion six-month (or 26-week) T-bills auctioned on May 5. The Department of the Treasury also auctioned $24 billion ten-year Treasury notes on May 7, and $16 billion 30-year bonds on May 8.

The ten-year Treasury note auction in May saw issuance increasing to $24 billion. The bid-to-cover ratio dropped to 2.63x from 2.72x for the April auction, primarily on account of higher issuance.

Primary dealers accounted for only 29% of the allotted securities, while indirect bidders such as international banks and monetary authorities were allotted 49% of the auctioned securities. Remaining 21% were allotted to direct bidders such as pension funds and insurance companies. The low proportion of primary dealers is an event of significance because the direct and indirect bidders generally bid for securities to hold them till maturity. Higher proportion of direct and indirect bidders indicates higher end-user demand for the securities. Primary dealers buy the securities in auctions with an intension of reselling them in the market, in turn, acting as market makers.

Investors seeking to invest in Treasury notes can invest in ETFs such iShares Barclays 3-7 Year Treasury Bond Fund (IEI), iShares Barclays 7-10 Year Treasury Bond Fund (IEF), and Vanguard Short-Term Government Bond ETF (VGSH). Investors looking at an intermediate-term investment horizon, but who are willing to take a higher risk can invest in corporate bond ETFs such as iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and iShares iBoxx $ High Yield Corporate Bond ETF (HYG).

Read the next part of the series to know more about the 30-year Treasury and investment-grade bond issuance from last week.

Continue to Part 6

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