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An investment term that is often associated with a treasury auction, the bid-to-cover ratio involves the number of bids that are accepted for the auction divided into the number of bids that were properly submitted in relation to the auction. The calculation of the bid-to-cover ratio is understood to be an accurate means of determining the level of demand for the auction.
The ratio is considered to be an accurate gauge of the current level of desirability for the issue involved in the auction. A high bid-to-cover ratio indicates that the level of investor desire for the issue is very high, and that there is every chance that another similar auction would result in excellent returns. By contrast, a bid-to-cover ratio that is somewhat low is a strong indicator that current market conditions have limited the enthusiasm for the issue, and that engaging in a similar auction in the short term is probably not advisable.
Because the bid-to-cover ratio is held in such high regard by so many investors, it is not unusual for traders to monitor the performance of an issue through a series of auctions before making a decision to place a bid. This is especially true for investors that tend to be conservative. Strong and continuous performance of an issue over a period of time indicates the presence of an investment opportunity that shows excellent possibilities of growing over the long term. That type of performance is important to the investor that prefers to make decisions based on solid evidence, rather than reliance on methods that are based more on instinct and conjecture.
For the new investor, the bid-to-cover ratio is an excellent market indicator to watch. The simplistic calculation of the ratio, coupled with the relatively easy underlying principles that usually underpin the reasons for the performance of the issue, provides the perfect way to learn how the market functions. As a reliable means of evaluating opportunities and planning future actions, the bid-to-cover ratio is ideal for both issuers and buyers.