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FEDPOINT

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" dealersfinancial 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 securitiesgovernment notes and
bondswere 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

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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

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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.

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NAME

BID PRICE (DISCOUNT) AMOUNT

YIELD

Bidder 1

$987.16

(5.08%)
5.22%

$3.5 billion

Bidder 2

$987.13

(5.09%)
5.23%

$2.5 billion

Bidder 3

$987.11

(5.10%)
5.24%

$3.0 billion

Bidder 4

$987.11

(5.10%)
5.24%

$3.0 billion

Bidder 5

$987.08

(5.11%)
5.25%

$2.0 billion

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Bidder 6

$987.06

(5.12%)
5.26%

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$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
2-year notes
5-year notes
10-year notes

weekly (Mondays)
monthly
monthly
Feb, Mar, May, Jun, Aug, Sept, Nov, Dec

April 2007

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