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Why 3-month Treasury bill auctions see higher market demand

Phalguni Soni

Why investors are showing preference for high-grade bonds (Part 6 of 8)

(Continued from Part 5)

13-week Treasury bill auction held on July 14 sees higher market demand

The U.S. Treasury held the weekly auction for 13-week, or three-month, Treasury bills (BIL) on July 14. $25 billion worth of Treasury bills (or T-bills) were on offer. The weekly issue size for the 13-week T-bill auction has been the same at $25 billion in all auctions held since the February 24 offering.

The high discount rate was lower at 0.025% in the July 14 auction, compared to 0.03% in the auction held the previous week. The average discount rate for 2Q14 was reported at 0.03% compared to 0.05% in the 1Q14.

Key demand-side trends

The bid-to-cover ratio for the July 14 auction came in at 4.82x—higher than the 4.62x recorded in the July 7 auction. This was also the highest bid-to-cover ratio recorded since the June 9 auction.

A declining bid-to-cover ratio in June, has been a key trend characterizing the three-month auction. Since then, the bid-to-cover ratio has been coming in higher in the first two auctions held in July. The average bid-to-cover ratio in 2Q14, came in at 4.72x compared to 4.54x in June. The bid-to-cover ratio in the first half of 2014 averaged 4.61x.

Bidder demand

Unlike the six-month auction, the share of primary dealers in the July 14 auction was lower at ~67%, compared to ~78% in the previous week’s auction. The percentage of indirect bids increased from ~15% to ~27% in the July 14 auction. Direct bids accounted for just ~6% of the total issuance.

Direct bids are key indicators of domestic market demand, while indirect bids include bids made by foreign sovereigns and central banks. The demand from overseas bidders has increased this year due to geopolitical risks abroad. This has increased the demand for safe-haven assets like U.S. Treasuries (IEI) and investment-grade corporate bonds (VCIT).

Primary dealers act as market makers at Treasury auctions and clean up excess supply relative to demand for the securities on auction. A decrease in the allotment to primary dealers is indicative of stronger market demand. An example of a primary dealer is Goldman Sachs (GS).

One-month Treasury bill auction

In the following section, we’ll analyze the key takeaways from the one-month Treasury bill (MINT) auction held on July 15.

Continue to Part 7

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