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Why the Treasury bills auctioned last week remained high in demand

Chanderlekha Nayar

Market activity update: The Treasuries and investment-grade bonds (Part 3 of 7)

(Continued from Part 2)


Treasury bills (or T-bills) are short-term debt obligations issued by the U.S. government through a single-price auction, meaning all the competitive and non-competitive bidders are issued T-bills at a yield quoted by the lowest bidder. As the bill price and its yield share an inverse relationship, the lowest yield gives the U.S. Treasury the maximum proceeds from an auction.

The U.S. Treasury Department auctioned $25 billion in three-month bills at a discount rate of 0.045%, down from 0.050% the previous week. The coverage for the 13-week T-bill at a 4.83x bid-cover ratio remained strong versus the 4.61x in the previous week. The bill will mature on July 3, 2014.

Another $23 billion in 26-week (or six-months) T-bills was auctioned on the same day, at a discount rate of 0.065%, down from 0.075% the previous week. At a 5.18x bid-cover ratio compared to a 5.05x bid-cover ratio in the previous week, the auction remained in high demand. The bill will mature on October 2, 2014.

The four-week T-bill auction was initially announced on Monday (March 31) and auctioned on Tuesday (April 1). While the auction size was lower at $25 billion, the investor’s demand for the four-week T-bill remained relatively high at a 4.67x bid-cover ratio compared to a 4.65x bid-cover ratio in the previous week. The bill will mature on May 1, 2014. The bid-cover ratio measures the total dollar amount of bids for a particular auction compared to the actual amount of debt sold. The higher the ratio, the more people are wanting to buy that debt.

The discount rates reflect that the bills sell for less than face value. Unlike the Treasury notes (ITE) and bond (TLT), T-bills don’t pay interest rates. Hence, these bills are auctioned at discount or at par. The difference between the discount given at the auction and the face value is the interest earned by the investors in the Treasury bills. These T-bills could be bought either directly at Treasury auctions held every week or from the secondary market from designated dealers.

Bond prices on SPDR Barclays 1-3 Month T-bill (BIL) and iShares Short Treasury Bond (SHV) fund were unchanged at $45.8 and $110.3, respectively. The iShares Short Treasury Bond (SHV), having maturity of between one and 12 months, particularly remained in high demand, with a second week of straight fund inflows of $186.1 million—even higher than the long-term Treasury bonds. The long-term funds including iShares 10-20 Year Treasury Bond (TLH) and iShares 20+ Year Treasury Bond (TLT) posted weekly inflows of $1.01 million and $34.4 million, respectively. The SPDR Barclays one-three month T-bill (BIL) ETF registered a net outflow of $13.2 million last week.

The next part of the series is about the 52-Week T-bill (SHY) auction.

Continue to Part 4

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