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The Treasury Auction Process

United States government securities are issued by the Bureau of Public Debt, a department of the U.S. Treasury. The Bureau of Public Debt conducts treasury auctions during which time investors can purchase a portion of the latest on-the-run issue of treasury bills, notes, and bonds. An on-the-run issue is the latest issue of securities auctioned by the U.S. Treasury. All previous issues are known as off-the-run issues.

Treasury bills, notes, and bonds are available for auction in the following frequencies:

U.S. Treasury Auctions

T-Bills
     3 Month:   Weekly; auctioned every Monday
     6 Month:   Weekly; auctioned every Monday
     1 Year:     Auctioned every four weeks on Thursdays

T-Notes
     2 Year:    Auctioned at the end of each month
     3 Year:    Auctioned quarterly; Feb, May, Aug, and Nov
   5 Year:    Auctioned at the end of each month
   10 Year:    Auctioned six times/yr; Feb, May, Jul, Aug, Oct, Nov

T-Bonds
30 Year: Auctioned three times/yr; Feb, Aug, Nov

Treasury auctions operate as single-price auctions, or Dutch Auctions. Prior to each auction the Treasury announces the approximate size of each issue of bills, notes, and bonds. Investors who wish to purchase securities participate as competitive bidders or noncompetitive bidders. Competitive bidders (generally large institutional investors) must specify the type and quantity of securities they wish to purchase and the bid (lowest yield) that they are willing to pay to purchase them. Noncompetitive bidders (generally retail or small-scale investors) do not submit bids although each must specify the quantity of securities they wish to purchase.

At the close of the auction, the treasury compares the bids of all competitive bidders and establishes a stop yield that is approximately equal to the mean of all competitive bids. The competitive bidders who submitted offers less than, or equal to, the stop yield, are awarded the type and quantity of the securities they requested. Competitive bidders who submitted bids greater than the stop yield do not receive any of the issue. All non-competitive bidders receive the quantity of securities they requested at the established stop yield.

Questions:

1. Describe the auction process used to allocate new issues of U.S. Treasuries to the investing public.

2. Differentiate between competitive bidders and noncompetitive bidders.

Answers:

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