Bid-to-Cover Ratio: What it is, How it Works, Example

What Is the Bid-to-Cover Ratio?

The bid-to-cover ratio is the dollar amount of bids received in a Treasury security auction versus the amount sold. The bid-to-cover ratio is an indicator of the demand for Treasury securities. A high ratio is an indication of strong demand.

Understanding the Bid-to-Cover Ratio

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

For example, if a Treasury auction offers $20 billion in seven-year bonds, and bids amounting to $40 billion are received, then the bid-to-cover 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 security type. On the other hand, a low ratio is an indication of a disappointing auction. Bid-to-cover ratios typically exceed 2.0, especially for shorter-term securities.

Bids are submitted via the Treasury Automated Auction System (TAAPS) or through TreasuryDirect. The largest purchasers are primary dealers and they usually sell them later on the secondary market. To ensure that the secondary market remains competitive, bidders are allowed to purchase no more than 35% of an offering.

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

Example of the Bid-to-Cover Ratio

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

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

Special Considerations

Although the bid-to-cover ratio can be used as an indicator of the demand for Treasuries, it should be viewed in the context of the overall market. Other factors can influence the outcome, resulting in a low bid-to-cover occurs, such as an auction with an increased amount of new bonds being issued and sold. In other words, if a flood of Treasuries was issued, the supply might exceed the demand for that auction.

Also, the secondary bond market–containing previously-issued bonds–can be an indication of the demand for Treasuries. For example, if bonds were sold off preceding an auction, it might indicate less demand for Treasuries. Conversely, if there was an increase in investment flows into the bond market leading up to an auction, that might be an indication that there will be an increase in demand–or a higher bid-to-cover ratio–for that auction. Since 1970, the Federal government has run deficits during every fiscal year for all but four years, from 1998 to 2001. If the U.S. continues to run annual budget deficits, it's likely we'll continue to see new Treasury auctions for the foreseeable future.