What Is a Bill Auction?
A bill auction is a public event held weekly by the U.S. Treasury to offer federal debt obligations, specifically Treasury bills (T-bills), which have maturities ranging from one month to one year. There are 24 authorized primary dealers required to participate and bid directly on each issue. This auction method is the official way T-bills are issued.
Key Takeaways
- Treasury bills are issued through an electronic auction conducted weekly by the government.
- Both institutional and individual investors can participate; however, 24 primary dealers—financial institutions and brokerages—are mandated to be involved.
- Participants are divided into competitive and non-competitive bidders. Competitive bids determine the discount rate for each T-bill issue, while non-competitive bids are guaranteed securities, though they must accept the rate set by competitive bids.
- The lowest discount rate needed to meet the amount of debt being sold determines the ‘winning’ yield.
Understanding a Bill Auction
The weekly bill auction functions as an electronic Dutch auction. In this process, investors submit bids indicating the quantity and price they wish to pay. The best bids are accepted, and the final offering price is set after evaluating all bids.
Notifications are released a few days before the auction, detailing auction dates, issue dates, amounts of securities to be sold, and the deadlines for bidding. Bids can be submitted up to 30 days before the auction.
During the auction, competitive bids are used to decide the discount rate. Only authorized primary dealers, such as banks and brokerages, can submit these bids. These bids influence the interest rate of each issue. Once purchased, primary dealers can hold, sell, or trade the bills. Economic conditions and market demand impact the uptake of T-bills.
All bill auctions are accessible to the public via Treasury Direct or the Treasury Automated Auction Processing System (TAAPS).
The Participants in a Bill Auction
Participants include retail and institutional investors who submit either competitive or non-competitive bids. Smaller investors typically submit non-competitive tenders, agreeing to accept the final discount rate without knowing in advance what it will be.
Larger investors, such as institutions, submit competitive tenders, limited to 35% of the offering per bill auction. These bidders specify the lowest discount rate they are willing to accept. The lowest rates are accepted first, meeting the supply needs. The final accepted rate become the ‘winning’ yield after non-competitive bids are deducted. Competitive bidders are not guaranteed to receive T-bills; this is contingent on their offered rates.
Non-competitive bid submissions close at 11:00 a.m. ET on auction day, while competitive bids close at 11:30 a.m. ET on auction day.
How a Bid Auction Works: An Example
Suppose the Treasury needs to raise $9 million in one-year T-bills at a 5% discount rate. Here’s how competitive bids might look:
- $1 million at 4.79%
- $2.5 million at 4.85%
- $2 million at 4.96%
- $1.5 million at 5%
- $3 million at 5.07%
- $1 million at 5.1%
- $5 million at 5.5%
The Treasury will accept the lowest rates first, comprehensively filling up to $9 million. Thus, bids up to 5.07% would be fully or partially approved, clearing the auction at this rate. All successful competitive and non-competitive bidders would receive a T-bill priced at this discount rate of 5.07%.
On issue day, Treasury delivers T-bills to non-competitive bidders who made submissions. These bidders are subsequently charged for the T-bills at a price per hundred dollars.
Related Terms: competitive bids, non-competitive bids, discount rate, primary dealers, Dutch auction.
References
- Treasury Direct. “Announcements, Data & Results”.
- Federal Reserve Bank of New York. “Primary Dealers”.
- Treasury Direct. “Auctions”.
- H. Kent Baker, Greg Filbeck, and Andrew C. Spieler. “Debt Markets and Investments”, Page 642. Oxford University Press, 2019.
- Federal Reserve Bank of New York. “Treasury Auctions”.
- Treasury Direct. “Treasury Bills in Depth”.
