Treasury AuctionsJake Thompson

Outlineo What they areo How they worko Who uses themo History

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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 auctiono Market to issue new treasury

securitieso 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 lesso 4, 13, 26, and 52 week maturities, auctioned

at different intervalso 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 yearso Quarterly auctionso Coupon securities

Securities- TIPS -

o Treasury InflationProtectionSecurities

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

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Auction Process- Auction Methods -

o Multiple-Price methodo 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 allocatedo 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 securitieso 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 yieldo 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 biddingo single-price (Dutch) method for all auctionso sells 4 types of securities

o 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 ??