Bid-to-cover (BTC) ratio is the term that is often encountered when discussing about the government bond and sukuk issuance which is how the government bond is issued in Malaysia. You can read more about Malaysia government bond HERE.
So, what is this bid-to-cover (BTC) ratio means and what does it measure?
For example, in BIX Malaysia 4Q20 report on the Government Bond Auction in Malaysia, it states that the average of bid-to-cover ratio received by the local government bond, MGS and GII was at 2.113x , meaning the bids or offer prices received is 2.113 times higher than the amount of the bonds being auctioned during the quarter. The BTC ratio is also being mentioned in the US Treasuries auction result.
In any countries, the government funds its budget deficit and national expenditures by issuing bonds. Investors who purchase the government’s bonds will receive a periodic coupon payment as return. If the bonds are held until maturity, the principal will be returned to the investors. When the government first issue its bonds or securities, they do it in a primary market via auction. The central bank, as a representative of the government will tender an announcement regarding the security offering, which authorized market participants such as principal dealers are invited to participate in the auction. Principal dealers will submit their bids or prices they are willing to purchase.
The bid-to-cover (BTC) ratio definition is the amount of bid received for each particular issuance. For example, if the auction sells a RM 5 million bond, and it receives RM 10 million worth of bids, then the BTC for this bond is at 2.0x, indicating there are twice the amount of bid for the bond compared to the available units.
BTC is an indicator of how strong the demand is for the security being auctioned. It measures how much the amount of bids received in the auction compared to the value amount of the security sold. The higher the BTC ratio, the better, as it signals a strong demand for the bond. The BTC of the bond is also compared to the BTC received in the past 12 months for the same bond. It is considered as a successful auction if its BTC is substantially exceeded the average BTC of the same security within the previous 12 months.
The results of the previous auctions and upcoming auctions are published in the BIX Malaysia Quarterly Report as shown by the image above. Seven different government bonds with total issuances amount of RM 28.50 billion were auctioned during the fourth quarter of 2020. Under the fourth column of the table, Reopening refers to the existing issuance that is reopened for auction. Reopening issuance is a new security with the same terms and conditions, maturity date, stock code and coupon rate as the existing issuance. The only difference is the issuance date and purchase price depending on the current state of the market.
On average, the government bond auctions in the 4Q20 received 2.133x bid-to-cover (BTC) ratio, and improvement from the previous quarter, 3Q20 with 1.983x BTC. The GII 05/23, which will mature in May 2023 as shown in the stock name garnered the highest BTC of 3.093x. The bids received by the GII 05/23 is 3.093 times higher than the amount offered to sell in the auction.
There are many possible explanations on why some bonds received low bid-to-cover (BTC) ratios.
Firstly, the amount of bonds the government offers in the auction is too big, which create an excess supply that cannot be fulfilled by existing demands. Secondly, there is a change in appetite towards riskier asset in the market. Government bond is considered as a risk-free asset with guaranteed return of capital. Compared to risky assets like equity, the return from the investment in government bond is relatively lower. When the market expects potential growth and recovery in the economic cycle, rationally they are more inclined to invest in riskier assets with higher return than government bonds. This causes a lower demand for bonds. Lastly, the low BTC in government bond auction can be influenced by the confidence in the currency which the government bond is denominated. Typically, the government will issue a bond in its own currency. When the market projects the currency will depreciate, the demand for the bond especially from foreign investors will decline.
For the next article, we will write more on the system and procedure of Government Bond Auction in Malaysia.
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Securities Commission Malaysia (2009). Malaysian Debt Securities and Sukuk Market: A guide for Issuers and Investors. Retrieved from https://www.sc.com.my/api/documentms/download.ashx?id=9b218a7d-9ce0-47e6-a2e1-2ee38bad11b1
Bond Info Hub. Retrieved from https://bondinfo.bnm.gov.my/
Treasury Direct. How Treasury Auctions Work. Retrieved from https://www.treasurydirect.gov/instit/auctfund/work/work.htm
Federal Reserve Bank of New York (February 2005). The Treasury Auction Process: Objectives, Structure, and Recent Adaptations. Retrieved from https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci11-2.html
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