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Treasury Auctions
Sean Bell, Treasury Auction
& Low-CarddrawingExpert
Treasury Auctions
So—what is a Treasury Auction??
The tool used by the Federal Gov’t to efficiently raise funds for operating expenses and to service the national debt.
Specifically….. A method of selling gov’t securities via U.S.
Treasury Department (semi-) public auction. Goal: to maximize price received, while minimizing sales expenses.
2003 auctions = $3.42 trillion total sold
Treasury Auctions
Why Should You Care? 1) A steady, if unspectacular, investment option 2) U.S. national debt growing exponentially
Just keeping up with the interest is a huge cash drain
So, the Federal Gov’t has used sales of Gov’t securities to finance deficit spending and associated debt servicing costs
How big is the debt? Take a look at past and present…
U.S. DebtClock
U.S. DeficitGrowth
Treasury Auctions
Discussion Topics:
1) What & Why of Treasury Auctions
2) Definitions 3) How an Auction Works 4) Scandal and Evolution
Treasury Auctions Definitions:
Treasury Bills, Notes, and TIPS (General term = Bonds) Government securities “backed by the full faith and
credit of the U.S. Gov’t” BILLS: Maturity period a year or less
Do NOT pay interest---instead, sell at a discount to “Par” (face) value, then mature at full value---the difference is the yield
The discount determined by the auction $1 million max purchase per auction per buyer
NOTES: 2-10 year maturity period Pay fixed interest every 6 months until maturity
TIPS (Treas. Inflation Protected Sec.) are indexed off CPI to adjust interest paid (2X/yr).
5, 10, and 20 year maturity, at present time BONDS: Bonds no longer sold, though many still maturing—10
to 30 years. Twice annually interest payments
Treasury Auctions Definitions:
“Auctions”---only for the sale of T-Bills, Notes, and TIPS (NOT for U.S. Savings Bonds)
Most auctions since 1992 single-price format or “Dutch Auction”; 1998 ALL
Silent, conducted electronically today Consist of 2 types of bids:
COMPETITIVE & NONCOMPETITIVE
Routine, stable, scheduled
Treasury’s stated goal is to meet financing needs with the lowest possible cost over time
AuctionSchedule
Treasury Auctions COMPETITIVE BID
Typically pro investors, a smaller % of bids
Specify rate offered and quantity desired
Used to determine the market rate/yield
Only those bids at or below the winning bid stop rate will be filled
A few other stipulations: see matrix
NON-COMPETITIVE Anybody else, that
just wants to buy at market
Specify only amount desired
Accept wherever the market rate ends up: the “bid stop”
Deducted from total issue before competitive bids: if enough to cover N-C bids, ALL will filled
Treasury Auctions
Discussion Topics:
1) What & Why of Treasury Auctions 2) Definitions
3) How an Auction Works 4) Scandal and Evolution
Treasury Auctions HOW an AUCTION WORKS: Bidding
General Public/Brokers directly through Treasury-Direct electronic
money transfer system for individuals Using tender form, mailed to Treasury
Primary Dealers Small number (about 30) dealers meeting Fed
requirements for trading volumes, stability, etc. Brokers also able to trade in “when-issued”
securities --available pre-auction only to brokers Helps establish price the auction will go at
TAAPS electronically aggregates bids and conducts auction
Treasury Auctions HOW an AUCTION WORKS: TAAPS
Auction cycle time keeps reducing Several hours in late 1980’s Under two hours early 90’s 2003 goal < 2 minutes
Goal is to reduce investor risk by decreasing time from bid to auction; theory is prices higher w/less risk
Treasury Auctions Example Auction:
Single price, “dutch” auction Lowest yield bid = highest price for treasury Lowest discount = highest price for treasury
Treasury auction total issue $10.0 billion
Noncompetitive bids $6.0 billion
Amount left for competitive bidders $4.0 billion
Competitive bids received:
A) 5.50% (lowest yield/highest price) $750 million
B) 5.51 $750 million
C) 5.52 $750 million
D) 5.53 $750 million
E) 5.54 $750 million
F) 5.55 (highest yield/lowest price) $750 million
Treasury Auctions Example Auction:
$10B Securities sold $6B non-competitive: sold at bid stop $4B Competitive: also sold at bid stop 33% of buyers at yield stop allocated before
running out No bids at 5.56% or higher accepted
AUCTION METRICS: High bid: 5.50%
Stop Yield: 5.55%
Awarded at stop: 33%
Average bid: 5.525%
Treasury Auctions Other-than-Auction Transactions:
Auctions are the Primary Market for gov’t securities…along with the Primary Dealers and “when-issued” securities
“wi market” trading from announcement day to day of auction
Secondary Market exists to trade previously issued bonds, OTC
Primary markets in New York, London, Tokyo
Creates continuous, 24 hr. trading
Treasury Auctions
Discussion Topics:
1) What & Why of Treasury Auctions 2) Definitions 3) How an Auction Works
4) Scandal and Evolution
Treasury Auctions Salomon Brothers Scandal:
Infamous 1991 attempt by Salomon to corner bond market
Fraudulently placed orders in customers’ names
Created “significant” overpricing on issue for about 6 weeks (.16-.25%)
Interestingly, created situation which probably benefited gov’t
But created lack of confidence: back to risk/return…drives down Treasury revenue
Treasury Auctions Evolution:
Effects of Technology and Procedures drive changes
Technology including: Automated order entry systems Computerized verification of bidder eligibility
Procedures Response to various scandals, irregularities Staying current w/ trends (i.e. globalized
money markets opening Primary Dealer network to foreign firms in 90’s)
Treasury Auctions Evolution Conclusions:
Treasury goal to minimize transaction/auction expense
Adaptive and willing to use new technology and tools
Can be slow to change policies Change seems reactionary
Treasury Auctions
U.S. Treasury…1784, 1833, and now~
Questions?