As you can imagine, the US government has a tremendous amount of treasuries to sell each year, both from refinancing maturing debt and to finance government deficits. The US Treasury Department is responsible for selling this debt. All told, the US Treasury Department issued $7.5 trillion in debt in 2011. All of this debt was sold using a dutch auction process. There were 269 public auctions in 2011 and while multiple auctions are often held on the same day, auctions occur very frequently.
How do Treasury Auctions Work?
1) The Treasury Department has a schedule for announcing the details of upcoming auctions and the timing of those auctions. We know far in advance what is being auctioned (T-bills, notes, bonds, TIPS) and the maturity of the debt. The key detail which the market wants to know when the details of an auction are announced, is how much debt is being sold.
The Treasury Department has discretion on how to go about financing the debt. They can choose to finance the debt favoring short-term T-Bills, medium term Treasury Notes , or longer term Treasury Bonds. TIPS can also be issued in a range of maturities. Thus, it’s possible for the Treasury Department to surprise the market by changing the available supply of a particular maturity.
The announcement of the auction details is made at 11:00 AM of the scheduled day.
2) Treasury Auctions are usually conducted from 2 days to 7 days after the announcement of the auction details. There are two types of participants in Treasury auctions. Non-competitive and competitive bidders. Individual investors that want to participate in treasury auctions can participate as non-competitive bidders via TreasuryDirect.gov. (Technically, an individual could place a competitive bid but, Learn Bonds Does not recommend it.)
When placing a non-competitive bid your are all but guaranteed to get the amount of the bonds you desire to purchase. You can purchase from $100.00 to $5 Million in bonds, and anywhere in between in increments of $100. The yield on the bond will be determined by the competitive side of the auction but, you will receive exactly the same yield as the winning competitive bidders.
The competitive side of the auction is handled as a dutch auction. Bidders put in the amount of the debt being auctioned they want to own and the lowest yield that they are willing to accept. The lowest yield / highest price which meets the supply of debt being sold serves as the “winning” yield. That is the yield that everyone in the auction on the competitive side who bid at or above that level receives. That is also the yield that the non competitive bidders receive.
3) The results are announced the day of the auction typically within a couple minutes of 11:30 AM EST for T-bills and 1:00 PM for Treasury Notes and bonds. Not only is the winning yield announced, but key information regarding the auction like the total dollar amount of bids. As we will explore in our next article “Treasury Auctions 201”, this information can sometimes influence the trading of Treasuries.
Within a week of the auction is the settlement date which is when money must be provided to the treasury by the winning bidders and bonds are issued.