3 And 6 Month Bill Bids-To-Cover Plunge To Lowest In A Decade Amid Fleeing Demand

While demand for US Treasurys remains brisk at primary auctions (if more questionable in the secondary market where we recently learned that Russia liquidated virtually all of its Treasury holdings, in Mayl), the same can hardly be said for the short-end of the market, where moments ago we saw what happens to auction demand in a time of rapidly rising rates and rising supply.

As shown in the chart below, while the yield on 3 Month Bills auctioned off today came in largely as expected at 2.010%, the demand did not, and after dropping to a cycle low Bid to Cover of 2.62 last month, today's 3 Month (or 12 week) auction suffered from one of the lowest demands on record, tumbling to just 2.54 from 2.87 last week, with $129.7BN in bids tendered for $51BN in paper, down sharply from $146.2BN on July 30. In context, this was the lowest Bid To Cover in the past ten years, and one would have to go back all the way to the post-Lehman days of 2008 to find a lower BTC.

A similar plunge took place in the 6-Month Bill, where the Bid to Cover likewise plunged from 3.140 to 2.660 in just one week.

Meanwhile, supply is mounting, and on Tuesday the Treasury plans to sell $70b of 4-week paper, the most for the tenor on record, according to Treasury data since 2001, with the auction size set to eclipse the previous record of $65BN.

And with both T-Bill issuance set to grow as per the latest Treasury announcement, and rates set to rise for the foreseeable future, two things are certain: not only will the Libor-OIS spread resume widening amid the continued surge in short-term supply and increasingly tighter financial conditions, but demand will continue to slide, although the good news is that we are still well off from the record lows, in which auctions were only 2.0x covered at the start of the century. That said, who knows: perhaps the break in the bond market will begin with a failed Bill auction as the US Treasury finds it increasingly difficult to roll over short-term debt.

What we do know is that today's sloppy 3- and 6-Month auctions - two unexpectedly ugly Bill auctions on the same day - indicated that demand for near cash-equivalents is suddenly becoming quite scarce at a time when supply will continue to grow indefinitely to fund the blowing out US budget deficit.

Comments

ssk81646 Mon, 08/06/2018 - 11:50 Permalink

 

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ssk81646 Mon, 08/06/2018 - 11:54 Permalink

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Jim in MN Mon, 08/06/2018 - 11:56 Permalink

I bet the big banks can't wait to pull the trigger on the 'shocking market plunge' before the midterms.

But which week in Sept-Oct?  Can't make it TOO obvious.....dither, dither....

Ron_Mexico Jim in MN Mon, 08/06/2018 - 12:18 Permalink

if they follow the "template" of 2008, it should start breaking down this month. Few still remember that, even with the Wall St. disarray in progress, John McCain held a 5-6 point lead on Obola as late as the first week in September.  They want to make sure that the soccer moms get at least one bad 401k "print" before the elections.

In reply to by Jim in MN

Cosmicserpent Mon, 08/06/2018 - 12:08 Permalink

These stupid articles remind me of idiot weather reporters.  It tells us the highs and the lows and the last time it reached such levels, and then tells us NOTHING about what actually is expected to happen.

Lots of happy sun faces and frowny rain clouds but no correlations or predictions.

Piss. The. Fuck. Off.

Quivering Lip Mon, 08/06/2018 - 12:11 Permalink

What we do know is that today's sloppy 3- and 6-Month auctions - two unexpectedly ugly Bill auctions on the same day - indicated that demand for near cash-equivalents is suddenly becoming quite scarce at a time when supply will continue to grow indefinitely to fund the blowing out US budget deficit.

     

    "It can be done. ... It will take place and it will go relatively quickly.  ... If you have the right people, like, in the agencies and the various people that do the balancing ... you can cut the numbers by two pennies and three pennies and balance a budget quickly and have a stronger and better country." DJT

    When you throw in the word "like" and think two and three pennies are going to balance the budget you might sound like a delusional 14 year old.

    Thankfully we have the right guy at the helm with a history of bankruptcy.

    Yen Cross Mon, 08/06/2018 - 12:38 Permalink

      Did anyone notice how all the equity markets blew up after the Treasury auctions?

      Corps know rates are going to blow up in their faces, so they're buying back shares before it gets more expensive.

    Snaffew Yen Cross Mon, 08/06/2018 - 12:54 Permalink

    that means corporations have to borrow the $$$ to buy shares of their stocks.  If they are using cash on hand, then it doesn't matter if rates go to 20 percent.  Stock buybacks at ATH's on borrowed $$$ works in the very short term...in the long run, it's an incredibly stupid use of capital.  It just pads the executives with stock options and bonuses.

    In reply to by Yen Cross

    Yen Cross Snaffew Mon, 08/06/2018 - 13:10 Permalink

      They aren't using cash with rates this low. They are keeping their money in the bank for reserve capital when the SHTF again, so they don't have to borrow unproductively at higher rates, or in tighter capital market.

      The $ they use to do buybacks isn't at a variable rate you dolt! They issue debt at a fixed rate, and use the capital for the buybacks.

      The rates on the debt only change in the secondary markets, when the debt gets bought or sold between traders.

    In reply to by Snaffew

    Yen Cross BallAndChained Mon, 08/06/2018 - 14:23 Permalink

        The debt expires for the amount that the original coupon was written for. You shouldn't comment on things you don't understand.  Bond prices and yields move in opposite directions, so the coupon discount plus the rate are equal to the original $100.00 investment, as rates fluctuate.

       The interest costs incurred by corps are set at the time of bond issuance. If rates are 4.00% basis points for 3 years, it doesn't matter what they do after that point for the issuer. If rates move to 7.00% the price of the bond is discounted to reflect the rise in rates.

       If the bond was $100.00 @x-rate it doesn't matter what current rates are for the issuer. When the bond expires you get your $100.00 back.  Just like a $100.00 Treasury for 10 years at x-rate. When it expires you get your $100.00 back.

    In reply to by BallAndChained

    rejected Mon, 08/06/2018 - 14:06 Permalink

    Only ones buying these junk treasuries are central banks. They buy each others printing,,, keep all the currencies devaluing at the same rate which makes everything appear stable.

    It's all a scam and everyone knows this but the hope is the crooks can straighten it all out... thinking soon the sun will be shining and the birds singing.

    But hate to break the bad news,,, Crooks are Crooks. All they know are steal, scam and fraud. Many think they can go with the crooks and cover their selves when the crunch comes. Nope,,, only ones that can do that are the crooks because they know exactly what's coming and will have no problem preserving their present wealth PLUS buy your wealth for pennies on the non existent or useless dollar. They have done this several times in the past which is how old money is made.

    This time will be their greatest achievement. They may actually end up owning it all....