U.S. markets closed

Why Bid-to-Cover Ratio Jumped for 26-Week Treasury Bills Auction

Lynn Noah

Why Treasury Bonds Are Back in Demand

(Continued from Prior Part)

26-week Treasury bills auction

The US Department of the Treasury held its weekly 26-week Treasury bills (or T-bills) (BIL) (MINT) auction on February 8. T-bills worth $30 billion were on offer, the same as in the previous six auctions.

The bid-to-cover ratio jumped 11.0% from the previous week and came in at 3.8x for the March 7 auction. In 2015, the bid-to-cover ratio had averaged 4.0x. Bid-to-cover ratio depicts overall demand for the auction. After the European Central Bank announced an aggressive stimulus package for the Eurozone (discussed in part one of the series), investors are looking carefully for clues about the next interest rate hike in the US from the Federal Open Market Committee (or FOMC), which is meeting on March 15, 2016.

Mutual funds like the PIMCO GNMA Fund – Class A (PAGNX) and the Prudential Government Income Fund – Class A (PGVAX) provide exposure to T-bills.

Yield analysis

Treasury bills don’t pay a coupon. They’re offered at a discount to face value. They’re redeemable at par on maturity. The high discount rate for the March 7 auction fell slightly and came in at 0.475%, lower than the 0.480% in the previous week.

Market demand rose

Fundamental market demand rose from 51.6% in the previous week to 57.8% last week. Accepted indirect bids rose to 53.1% week-over-week from 47.4% in the previous week.

Meanwhile, the percentage of direct bids nudged up to 4.7% week-over-week from 4.2% a week ago. Direct bids include bids from domestic money managers like Invesco (IVZ) and Wells Fargo (WFC).

Due to the rise in market demand, the share of primary dealer bids fell to 42.2% of the auction from 48.4% in the previous week. Primary dealers are a group of 22 authorized broker-dealers. They’re obligated to bid at US Treasury auctions and take up excess supply. They include firms like Goldman, Sachs and Co. (GS) and Citigroup Global Markets (C).

Continue to Next Part

Browse this series on Market Realist: