Definition of the offer-coverage relationship

What is the offer-coverage relationship?

The bid-to-hedge ratio is the dollar amount of bids received at a Treasury auction versus the quantity sold. The supply / hedge ratio is an indicator of the demand for Treasury securities. A high ratio is an indication of strong demand.

Key takeaways

  • The bid-to-hedge ratio is the dollar amount of bids received at a Treasury auction versus the quantity sold.
  • The supply / hedge ratio is an indicator of the demand for Treasury securities; a high proportion is an indication of strong demand.
  • To obtain an accurate measure of demand, it is necessary to compare the bid-to-cover ratio of an auction with the average of the previous 12 auctions.

Understanding the offer-coverage relationship

Treasury auctions tend to occur more frequently for short-term issues: weekly for bills, monthly for notes, and quarterly for bonds. Buyers can include primary distributors, mutual funds, pension funds, foreign parties, and individual investors.

For example, if a Treasury auction offers $ 20 billion in seven-year bonds and bids are received in the amount of $ 40 billion, then the bid-to-hedge ratio is 2.0. A successful auction is one in which the bid-to-cover ratio substantially exceeds the average of the previous 12 auctions for that type of security. On the other hand, a low index is an indication of a disappointing auction. Offer and hedge ratios typically exceed 2.0, especially for short-term securities.

Bids are submitted through the Treasury Automated Auction System (TAAPS) or through TreasuryDirect. The most important buyers are the primary traders and they usually sell them later on the secondary market. To ensure that the secondary market remains competitive, bidders cannot buy more than 35% of an offer.

Once the auction is complete, competitive bidders will receive the amount they bid with the offered yield, starting with the lowest yield. The system then moves to the next lowest bid performance, and so on until the entire bid is completed.

Example of offer-coverage relationship

Below is an example of the results of an auction for the 10-year Treasury bond on November 15, 2019, as reported by the TreasuryDirect website (updated in real time as soon as the auction results are available ):

  • The gray arrows show the security type, the interest rate of the note, and the issue date of November 15, 2019. The maturity date of November 15, 2029 appears below the issue date.
  • The total amount that was auctioned is listed under the Accepted The column, highlighted in green, shows that approximately $ 27 billion in Treasury notes were auctioned.
  • The Tendered The column shows the amount of demand, which was more than $ 67 billion.
  • In other words, there was more demand for Treasuries than they were auctioned.
  • As a result, the bid / hedge ratio was 2.49, found at the bottom of the document, highlighted in blue.
Example of a Treasury bid to hedge auction.

Special Considerations

Although the supply / coverage ratio can be used as an indicator of the demand for Treasuries, it should be considered in the context of the market as a whole. Other factors can influence the outcome, resulting in a low hedge bid, such as an auction with a larger number of new bonds issued and sold. In other words, if a flood of Treasuries were to be issued, the supply could exceed the demand for that auction.

Also, the secondary bond market, which contains previously issued bonds, may be an indication of demand for Treasuries. For example, if the bonds were sold before an auction, it could indicate a lower demand for Treasuries. On the contrary, if there was an increase in investment flows to the bond market before an auction, that could be an indication that there will be an increase in demand, or a greater relationship between supply and coverage, for that auction. Since 1970, the federal government has run deficits in every fiscal year for all but four years, 1998 to 2001.. If the US continues to run annual budget deficits, we will likely continue to see new Treasury bond auctions for the foreseeable future.

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Mark Holland

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