Why didn't demand for Treasury notes and bonds rise much? (Part 6 of 8)
Yield convergence continues
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. T-bills are quoted at a discount to face value.
Last week’s T-bill auctions included $25 billion one-month (or four-week) T-bills auctioned on April 8, plus $25 billion three-month (or 13-week) and $23 billion six-month (or 26-week) T-bills auctioned on April 7. We already discussed the one-month and three-month T-bill auctions in the previous parts of this series. We’ll cover the six-month T-bill auction in this part of the series.
Demand for six-month Treasury bills has seen a continuous uptrend over the past four weeks, as we’ve seen in the rising bid-to-cover ratio. While the bid-to-cover ratio has remained high in each auction held in 2014, it was highest in the auction held on April 7 at 5.35x.
While the issuance of six-month T-bills remained unchanged from the previous week, at $23 billion, the high discount rate dropped sharply, to 0.050% from 0.065% for the previous auction held on March 31. As the lowest-discount bidder wins the bid and all the securities are issued at the lowest bid for the discount, the reduced discount rate implies aggressive bidding.
The reduction in the six-month T-bill discount rate also confirms the converging trend between three-month and one-month discount rates. This simply means that investors are more willing to invest in six-month T-bills than they were during the last auction.
Investors looking for ETFs investing in T-bills can invest in the SPDR Barclays Capital 1-3 Month T-Bill ETF (BIL) or the iShares Barclays Short Treasury Bond Fund (SHV). Investors looking for short-term investment opportunities like T-bills but ready to take higher risk can invest in ETFs like the PIMCO Enhanced Short Maturity Exchange-Traded Fund (MINT). The PIMCO Enhanced Short Maturity Exchange-Traded Fund (MINT) invests in short-term securities such as T-bills, commercial papers, mortgage-backed securities, et cetera. Of the fund’s assets, 70% are deployed in securities with maturity of less than a year. Financial services firms like Goldman Sachs (GS) and JP Morgan Chase (JPM) regularly issue short-term securities to meet their short-term funding requirements. Investors looking at a short-term horizon may invest in those securities to park their cash for the short term in safer securities.