Post on 01-Jan-2016
transcript
Treasury Auctions
Jake Thompson
Outline
o What they are
o How they work
o Who uses them
o History?
DEBT
The U.S. national debt is approximately $ 16.7 TRILLION.
We fund this debt through the sale of securities.
Treasury Auctions - What They Are -
o Competitive auction
o Market to issue new treasury securities
o Tool to fund public debt
Securities- Overview -
o Backed by the faith and credit of the U.S. Department of the Treasuryo “no credit risk”o Large volumeo High liquidity
o 2 typeso Discount – pay at maturity onlyo Coupon – pay interest every 6 months and
principle at maturity
Securities- Types -
o There are 4 types of securities currently sold at treasury auctions:o Billso Noteso Bondso TIPS
Securities- Treasury Bills -
o Mature in 1 year or less
o 4, 13, 26, and 52 week maturities, auctioned at different intervals
o Discount Securities
Securities- Treasury Notes -
o 2, 3, 5, 7, and 10 year maturities, auctioned at different intervals
o Coupon securities
Securities- Treasury Bonds -
o Mature in 30 years
o Quarterly auctions
o Coupon securities
Securities- TIPS -
o Treasury
Inflation
Protection
Securities
o 5, 10, and 30 year maturities
Auction Process- Announcements -
o Auctions are announced online with information:o Amount of the security being offeredo Auction dateo Issue dateo Maturity dateo Terms and conditions of the offeringo Noncompetitive and competitive bid closing
timeso Other information necessary
Auction Process- Competitive vs. Noncompetitive -
o Competitive:o Each bidder is competing for securities at their
best yield rate.o No bids > 35% of total offering
o Non-competitive:o Based on quantity, not yieldo Receive tenders at single-price yieldo Up to $1 million face value
Auction Process- Competitive vs. Noncompetitive -
Total amount of securities offered
Noncompetitive bids Total amount of securities auctioned to competitive bidders
− =
Auction Process- Auction Methods -
o Multiple-Price method
o Single-Price (Dutch) method
Auction Process- Multiple-Price -
o All accepted bids are given the yield they were bid for
Auction Process- Single-Price (Dutch)
Auctions -
o starting from the lowest yield bid, all bids are accepted until all the securities are allocated
o the highest yield bid accepted is the “Stop Yield”
o bidders at the stop yield are awarded a percentage of their tender on a pro rata basis
o all bidders above the stop yield are missed or “shut out”
Auction Process- Auction Methods -
o Single-price (Dutch)
o Multiple-price
3 Volunteers!
Auction Price
Which auction method is better for the Federal Reserve?
Treasury Auctions- People -
o Any firm can deal in government securities
o Only primary dealers can deal directly with the Federal Reserveo Firms must informally report positions and
trading volume to be a “reporting dealer”o Reporting dealers become primary dealers
when the Federal Reserve determines they meet the criteria
Treasury Auctions- Secondary Markets -
OTC market to trade outstanding securities
Government brokers trade with investing public and other dealer firms
Treasury Auctions- History -
o Started in 1929o only a competitive auctiono hand-delivered sealed bidso sold through subscription offerings, exchange
offerings, and advance refundingso multiple-price method for auctions
Treasury Auctions- History -
o 1947 – allow for noncompetitive bids with a weighted average sale price
o 1970 – bids were made by “price”
o 1983 – bids were made on basis of yield
o 1997 – issuance of TIPS (Treasury Inflation Protection Securities)
o 1998 – adopted single-price method for all auctions (Dutch auctions)
Treasury Auctions- History -
o competitive and non-competitive bidding
o single-price (Dutch) method for all auctions
o sells 4 types of securitieso Treasury Billso Treasury Noteso Treasury Bondso TIPS
Treasury Auctions- Summary -
o Treasury auctions are a tool to fund debt through the issuance of government securities
o Securities are currently sold as bills, notes, bonds, and TIPS
o Currently, treasury auctions allow competitive and noncompetitive bids, in a single-price auction method
o Only primary dealers can interact directly with the Treasury, but any firm or individual can purchase securities
QUESTIONS ??