Demand for Treasuries Rises after the Bank of Japan’s Rate Drop
13-week Treasury bill auction
The US Department of the Treasury auctioned 13-week Treasury bills, or T-bills, worth $34 billion on January 25. The amount on offer was $3 billion higher than in the previous week’s auction. Overall auction demand, as represented by the bid-to-cover ratio, fell by 2.9% last week. The bid-to-cover ratio fell to 3.3x from 3.4x during the previous week.
Mutual funds such as the Prudential Government Income Fund Class A (PGVAX) and the John Hancock Government Income Fund Class A (JHGIX) allow investors to gain exposure to three-month T-bills.
Yield analysis
T-bills do not pay a coupon. They are offered at a discount to face value and are redeemable at par on maturity. The high discount rate for the January 25 auction came in at 0.31%, which is higher than the rate of 0.26% seen in the previous week and the highest rate in recent times.
Market demand fell
Market demand for three-month T-bills fell to 36.2% of the accepted bids last week, as compared to 38.6% in the previous week. The percentage of indirect bids rose from 22.9% to 28.5%. Direct bids plunged. These bids, which had formed 15.7% of accepted bids in the previous week, fell to 7.7% last week. Direct bids include domestic money managers, such as State Street Corporation (STT) and BlackRock (BLK).
The share of primary dealer bids rose from 61.4% in the previous week to 63.8% last week. Primary dealers are a group of 22 broker-dealers authorized by the Fed. They are obligated to bid at US Treasury auctions and take up the excess supply. They include firms like Goldman Sachs (GS) and Citigroup (C). A rise in the percentage of primary dealer bids shows weak fundamental market demand.
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