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Quantitative Finance · Glossary

What is Bid-to-cover ratio and auction tail?

Also known as: bid-to-cover ratio · auction tail

Definition 4.4 Markets II: Rates, FX and Credit · Chapter 4 — The Treasury Market

The bid-to-cover ratio is the amount bid divided by the amount offered. The auction tail is the stop-out yield minus the when-issued yield (Definition 4.6) at the bid deadline: positive, the auction cleared cheaper than the market (it tailed); negative, richer (it stopped through).

The demand curve of : bids accumulated from the lowest yield. The stop-out is where the curve crosses the amount to be sold; the gap between it and the when-issued yield at the deadline is the tail. A book whose bids sit closer to the when-issued level would stop through. Data: the chapter’s simulated bid book.
Figure 4.1. The demand curve of Example 4.5: bids accumulated from the lowest yield. The stop-out is where the curve crosses the amount to be sold; the gap between it and the when-issued yield at the deadline is the tail. A book whose bids sit closer to the when-issued level would stop through. Data: the chapter’s simulated bid book.

Examples

Example 4.5 (A synthetic ten-year auction)

USD 42 billion of ten-year notes are offered; USD 300 million of noncompetitive bids leave USD 41.7 billion for 76.1 billion of competitive bids. The when-issued note trades at 4.180% at 13:00. The bids of Figure 4.1 reach 41.7 billion at 4.198%: that is the stop-out, bids there are filled at 95.02%, the tail is 1.8 basis points and the bid-to-cover ratio 1.82. Indirect bidders (investors bidding through a dealer) take 51.1%, direct bidders 10.6% and dealers 38.3%. The coupon is set at 4.125%, and every winner pays 99.409 for a note that the market valued at 4.180% a minute before. The auction is simulated; the procedure is the Treasury’s.

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