A non-competitive tender is an offer to buy United States Treasury securities that is made by non-institutional investors. These smaller investors do not participate in a formal auction for these securities; instead, they accept the market price set by other participants. In contrast, competitive tender offers are those made by large institutional buyers who collectively set the price of Treasury securities through a Dutch auction process.
Key Takeaways
- A non-competitive tender is an offer to purchase Treasury securities made by smaller investors.
- Non-competitive tenders don’t specify the price or terms of the security; the terms are set by a competitive bidding process among large institutional buyers.
- Investors can use non-competitive tenders to purchase between $10,000 and $500,000 worth of Treasury securities at a time.
How Non-Competitive Tenders Work
The United States Treasury sells trillions of dollars of securities every year. The buyers of these securities range from large organizations, such as primary dealer banks and foreign governments, to individual retail investors. Rather than negotiating with all these buyers directly, the Treasury instead holds regular auctions with certain large buyers and then uses the price set by those auctions to sell securities to smaller investors.
In 2019, the Treasury held 322 auctions and issued almost $12 trillion in securities. During these auctions, large institutional buyers place their bids for the price and amount of Treasury securities they wish to purchase. The Treasury, wishing to pay the lowest amount of interest possible, first accepts the bids with the lowest yields. They then gradually accept higher yield offers until they raise the required quantity of funds. This competitive bidding process determines the fair market value of its securities and then sells additional securities to non-institutional buyers at that market price.
There are several advantages associated with purchasing Treasury securities through non-competitive tenders. These tenders allow small investors to purchase securities without paying expensive brokerage fees, especially through government-run platforms like Treasury Direct. Non-competitive tenders also assure investors will receive a fair price, determined by the trading activity of large institutional buyers. The requirements for investing through non-competitive tenders are relatively modest, with a minimum offer size of $10,000 and a maximum of $500,000.
Step-by-Step Example of a Non-Competitive Tender
Using the Dutch auction process, the Treasury would begin by offering securities at a very low yield—so low in fact, that it attracts no bids from auction participants. Then, the yield is gradually increased until offers start flooding in; the process continues until enough bids have been made to absorb all the securities the Treasury wants to sell.
The participants in this auction process are institutional buyers, and their offers are considered competitive tenders. Once the Treasury has received the desired quantity of tenders, all the winning auction participants get to purchase their securities at the highest yield that was accepted.
For example:
- Let’s say an investor with a successful bid was willing to purchase securities at a yield of 0.10%.
- Meanwhile, the last investor to issue a successful bid did so at a yield of 0.30%.
All successful bidders will then be paid the higher yield of 0.30%, even if they initially bid at lower yields. This final yield of 0.30% is applicable for any non-competitive tenders offered by non-institutional investors. In such a way, the competitive bidding process of the institutional buyers sets the price for the smaller buyers using non-competitive tenders.
Related Terms: Competitive Tender, Dutch Auction, Treasury Securities, Retail Investors.
References
- Treasury Direct. “How Treasury Auctions Work”.
