Bid-to-cover ratio definition

Bid-to-cover ratio measures demand for government bonds and securities based on the volume of bids

Illustration of calculating                                 
Governments monitor the ratio to uncover the level of demand for their securities - Photo: Shutterstock

What is bid-to-cover ratio?

The bid-to-cover ratio considers the value of bids offered for an auction of bonds compared to the value or volume offered for sale.

Based on this ratio, an auction is classified as successful if the bid-to-cover ratio is higher than the average bid-to-cover ratio of the past 12 auctions for the same type of securities. Moreover, a ratio with a value of two or higher shows a high demand for a specific security. A value of one or below signals potential problems in the execution of the auction because there may not be sufficient demand for the securities.

As for any other product or service, demand as a factor affects the price level. Hence, governments monitor this ratio to uncover the level of demand for their securities. The demand defines the interest rate (price) they pay for the borrowed money. Higher demand for the securities results in a lower price paid, while lower demand will result in a price rise to increase the attractiveness of the security.  

Bid-to-cover ratio explained

The calculation of the bid-to-cover ratio is rather simple, based on the number of bids or the value of the bids. One way is to consider the number of bids received divided by the number of bids accepted. Another way to calculate this ratio is to consider the value of bids received in the auction in relation to the value of bids accepted, accordingly:

Bid-to-cover ratio = value of bids received/value of bids accepted.

For example, a Treasury auction offers $250m in two-year bonds. The demand in terms of the value of bids received for this auction is $750 million. The bid-to-cover ratio for this auction has a value of three ($750m/$250m). Hence, this auction is deemed successful. On another Treasury auction, the offered value of the security is $5bn, and the dollar amount of bids is also $5bn. The bid-to-cover ratio is 1 ($5bn/$5bn), and this auction may not be considered to be successful.

The lower value of the bid-to-cover ratio points to insufficient demand for the securities. In the situation where there is a wide spread between the average and high yields for the bonds, it is referred to as a long tail. The tail in Treasury auctions shows the difference in the highest yield on an auction and the expected yield for the auction prior to the start.

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