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Why the demand for certain Treasuries saw little change last week

Surbhi Jain

Must-know: How has the debt market performed in the past week? (Part 5 of 6)

(Continued from Part 4)

Treasury Yields

U.S. Treasury yields didn’t move much in the week ending May 23, attributed mainly to the relatively quiet week for economic data releases. Yields saw an increase only at the far end of the yield curve.

Treasury ETFs

Popular exchange-traded funds (or ETFs) like the iShares Barclays 1-3 Year Treasury Bond Fund (SHY) and the iShares Barclays 20 Year Treasury Bond Fund (TLT), track the performance of short-term and long-term U.S. Treasury securities, respectively. With Treasury securities highly sensitive to changes in the Fed funds rate and inflation expectations, one may want to de-risk or hedge by investing in ETFs like the ProShares Short 20+ Year Treasury (TBF). Besides Treasuries, ETFs like the ProShares Investment Grade-Interest Rate Hedged ETF (IGHG), which has its major holdings in companies like Citigroup Inc. (C) and JP Morgan Chase & Co. (JPM), also protect against interest rate risk.

The 13-week and 26-week T-bills auction

The U.S. Treasury’s regular auctions held on Monday, May 19 for its $25 billion worth of 13-week (or three months) and $23 billion worth of 26-week (or six months) T-bills saw a slight drop in demand for the three month T-bill, while the six month T-bill saw little improvement in demand, as indicated by the bid-to-cover ratio. The bid-to cover ratio assesses demand for the security by comparing the number of bids received in a Treasury auction with the number of bids accepted (or the amount of securities issued).

The bid-to-cover ratio for the three months T-bills decreased from 5.05 in the previous week’s auction to 4.82 for the auction held on May 19. For the same dates, the bid-to-cover ratio for the six months T-bills increased from 4.95 to 5.05 in the May 19 auction, as compared to the previous week. Primary dealers continued to grab the major share in the allotment at these auctions. However, their share increased for the 13-week T-bills, while it decreased for the 26-week T-bills.

The 4-week T-bills auction

The week also saw an increase in issuance size at the 4-week (one month) T-bills auction held on May 20. The issuance increased $45 billion from the $40 billion issuance in the May 13 auction of 4-week T-bills. The bid-to-cover ratio at this auction decreased to 4.04 from its previous reading of 4.70 in the May 13 auction. The share of direct bidders in the allotment increased substantially from 3.2% in the previous auction to 11.36% in the May 20 auction. As a result, the share of indirect bidders, including foreign banks and international authorities, decreased from 25.3% to 11.57%.

The next part of this series shares insight on the $13 billion TIPS auction held on May 22, which saw the strongest demand in two years.

Continue to Part 6

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