While demand for US Treasurys remains brisk at primary auctions (if more questionable in the secondary market where we recently learned that Russia dumped half of its Treasury holdings, or almost $50BN, in April), 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.
As shown in the chart below, while the yield on 6 Month Bills auctioned off today came in largely as expected at 2.075%, the demand did not, and after a solid Bid to Cover of 3.59 last week, today’s 6M auction suffered one of its biggest drops on record, tumbling to just 2.78, with $116.9BN in bids tendered for $42BN in paper, down sharply from $150.6BN on June 11. This was the second lowest Bid To Cover this decade, and only better than the 2.74 BTC printed on the February 12, 2018 auction.
And with both T-Bill issuance continuing to surge, and rates rising, two things are certain: not only will the Libor-OIS spread resume blowing out amid the continued surge in short-term supply, but demand will continue slide, although the good news is that we are still well off from the record lows, in which auctions were only 1.5x 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.
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