Treasury Auctions

  • The U.S. Government currently auctions Treasury bills, and notes to finance the public debt.
  • Most of the securities are bought by primary dealers which are large securities dealers; a small amount is purchased by individual investors.
  • Bids are submitted through Treasury Direct or through depository institutions, the Federal Reserve Bank of New York, and the Bureau of Public Debt. The Treasury's Bureau of Public Debt and the Federal Reserve Bank of New York offer bidding by computer to institutional investors such as banks, brokers and dealers.

The U.S. Treasury Department regularly borrows to finance the Federal Government's debt. From 1980 to 2006, the public debt of the United States grew from $930 billion to $8.68 trillion. Approximately one-half of that debt is held in Treasury bills, notes, and bonds, or "treasuries." The Treasury Department sells these securities at auctions held at the Federal Reserve Bank of New York, and the Bureau of Public Debt (BPD) in Washington, D.C. The rest of the debt is held mostly in federal and federally sponsored agency securities and U.S. Savings Bonds, and is not sold through the auction process.

Most treasuries are bought at auction by the "primary" dealers—financial institutions that are active in buying and selling U.S. government securities and have established business relationships with the New York Fed.

A much smaller volume of securities is purchased by individual investors who buy them directly from the Treasury Department at auction instead of from banks or brokers in the secondary market. Investors who purchase securities directly from the Treasury avoid the commission fees associated with purchases through a dealer.

An Investment with Diverse Maturities
Treasury auctions began in 1929 with the sale of Treasury bills, the shortest-term government security. At the time, longer-term securities—government notes and bonds—were sold only through underwriters, a practice that continued until the 1970s. Between 1973 and 1976, the auction process gradually replaced all other means of issuing notes and bonds. Currently, the Treasury auctions bills in three-, and six-month maturities. Notes are sold in two-, five-, and ten-year maturities. In October of 2001, the Treasury Department Decided to suspend the issuance of the 30 - year bond inflation - indexed bonds. In 1997, Treasury introduced a new security: the Treasury Inflation - Indexed security. It gives both individual and institutional investors a chance to buy a security that keeps pace with inflation. Since U.S. Government securities are free of default risk, exempt from state and local taxes, and among the most liquid of financial instruments, they are a popular investment for both individuals and institutions.

Occasionally, the Treasury auctions cash management bills (CMBs) to meet short-term financial needs. CMBs are obligations of the U.S. government with maturities that are set on an issue-by-issue basis. Most are issued with terms of less than three months. CMBs are auctioned almost exclusively to primary dealers.

A Public Announcement
The modern auction process for bills, notes, and bonds begins with a public announcement by the Treasury. A typical announcement might read, "The Treasury will auction $11,000 million of 91-day bills to refund $9,000 million of maturing securities and to raise about $2,000 million new cash." The announcement is carried by most major newspapers, the financial press, and some television stations. The Federal Reserve and the BPD make the announcement available on BDP's recorded messages at 800-722-2678 as well.

Treasury Buyback Program
On January 13, 2000, the treasury secretary Lawrence H. Summers announced the introduction of debt buybacks, an important new tool for Treasury's management of the public debt. Debt buybacks have several advantages for Federal debt management. They enhance the liquidity of Treasury benchmark securities, which promote overall market liquidity and should help reduce the government's interest cost over time. Buybacks will help prevent a potentially costly and unjustified increase in the average maturity of American debt by paying off debt that has substantial remaining maturity. On January 19, 2000, the Department of Treasury issued final rules setting out the terms and conditions by which outstanding, unmatured treasury securities may be bought back.

The Treasury Department publishes its buyback plan every three months. Participation in buybacks is strictly voluntary.

The Bidding Begins
Bids are accepted up to thirty days in advance of the auction, and may be submitted electronically through the Treasury Automated Auction Processing System (TAAPS) and by mail. All bids are confidential and are kept sealed until the auction date. In an auction, two types of bids can be submitted: Non-competitive tenders and competitive bids.

Non-competitive tenders are generally submitted by small investors and individuals. All non-competitive bidders are guaranteed to receive securities; they need only complete an application form and make payment by mail anytime before the normal 12:00 p.m. Eastern Time auction deadline. Noncompetitive bids submitted by mail must be postmarked by the auction and received by the date of the security.

Certified checks, or bank checks are required to purchase Treasury bills; personal and endorsed Treasury checks are accepted in payment for long term securities such as notes. The amount of securities that may be sold to a single non- competitive bidder is limited to $1 million per auction for bills and $5 million for coupon issues.

Competitive bids are usually submitted by primary dealers for their own accounts, or on behalf of customers. Bids are submitted in terms of yield or discount rate, stated in two decimal places for bills and three decimal places for coupon issues. To ensure that the secondary market for Treasury securities remains competitive, bidders are restricted to receiving no more than 35 percent of the total amount of securities available to the public. Many of the securities bought by large dealers will later be sold and resold on the secondary market to companies, banks, other dealers, and individuals.

Competitive bids are accepted until 1:00 p.m. Eastern Time on the day of the auction, and can be submitted in the same manner as non-competitive bids. The primary dealers submit their competitive bids through TAAPS at the last possible moment, sometimes literally seconds before the deadline.

Currently, the bids submitted through TAAPS are consolidated at the Federal Reserves in New York, Chicago, and San Francisco. Immediately after the auction deadline, these bids are reviewed and processed in these locations to assure compliance under the Treasury's Uniform Offering Circular. The competitive bids at each of the review sites are sorted and then reviewed electronically by the Treasury in Washington.

Determining the Winning Bids
Officials at the Treasury Department subtract the non-competitive tenders (which automatically receive securities) from the public offering amount to determine the amount of securities available to the competitive bidders. For example, if $1 billion in non-competitive tenders is received in an $11 billion auction, $10 billion in securities will be awarded to competitive bidders.

The Treasury officials work their way down the list of competitive bids, accepting the highest bid prices until all the securities have been awarded. All lower competitive bids are rejected. In the Treasury bill auction example below, securities would be awarded to the first four bidders only, whose bids total $12 billion. The two highest bidders would be awarded their total bid amounts, whereas the two bidders at the 5.10 percent discount rate would each receive $2 billion in securities.

Treasury sells its securities to the public through single - price auctions, where both successful competitive bidders and noncompetitive bidders buy securities at a price that equals the highest accepted yield (coupons securities such as notes) or the highest accepted discount rate (bills). The detailed list of accepted and rejected competitive bids is not released to the public, but the total amount of bids received and total accepted are made available. In addition, the high, low, and weighted averages of the price, discount rate, and equivalent bond yield of the accepted competitive bids are released to the public.

Bidder 1 $987.16 (5.08%)
$3.5 billion
Bidder 2 $987.13 (5.09%)
$2.5 billion
Bidder 3 $987.11 (5.10%)
$3.0 billion
Bidder 4 $987.11 (5.10%)
$3.0 billion
Bidder 5 $987.08 (5.11%)
$2.0 billion
Bidder 6 $987.06 (5.12%)
$1.0 billion

The weighted average price and yield from the successful competitive bids are applied to the non-competitive tenders; non-competitive investors won't learn the yield on the securities they have purchased until after the auction. The final price, discount rate, and yield is released to the public within two hours of the auction. Treasury auctions are held on a regular basis, generally as follows:

13-week and 26-week bills weekly (Mondays)
2-year notes monthly
5-year notes monthly
10-year notes Feb, Mar, May, Jun, Aug, Sept, Nov, Dec
April 2007