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 ??