primary dealers - large securities dealers/financial institutions that are active in buying & selling US government securities & have established business relationships with the NY Fed
* Most are bought by primary dealers; A small amount are bought by individual investors (who buy them directly from the Treasury Dept @ auction)
* Currently... bills in three- & six-month maturities; notes in two-, five-, and ten-year maturities;
* Occasionally, Treasury auctions cash management bills (CMBs) (w/maturities that are set on an issue-by-issue basis) to meet short-term financial needs
Bidding
* Bids are accepted up to 30 days in advance of the auction, & may be submitted electronically through the Treasury Automated Auction Processing System (TAAPS) and by mail. All bids are confidential & kept sealed until auction date.
* Two types of bids may be submitted...
(1) Non-competitive tenders... generally submitted by small investors & individuals... guaranteed to receive securities... amount of securities that may be sold to single non-competitive bidder is limited to $1MM per auction for bills & $5MM for coupon issues
(2) Competitive bids... usually submitted by primary dealers for own accounts, or on behalf of customers... bids are submitted in terms of yield or discount rate... to ensure that 2ndary market for Treasury securities remains competitive, bidders are restricted to receiving no more than 35% of total amount of securities available to public
* Three categories of bidders; Dealers + Directs + Indirects = 100%
(1) Dealers submit bidding for their own house accounts & are required to make bids
(2) Directs are non-primary dealer submitters. They may make bids for their own books or on behalf of clients. Some direct bidders may make bids to look to eventually become primary dealers.
(3) Indirects are customers placing competitive bids through a primary dealer, and are largely foreign and international monetary authorities placing bids through the NY Federal Reserve Bank
Determining the winning bids
* The non-competitive tenders (which automatically receive securities) are subtracted from the total offering to determine amount awarded to competitive bidders
* The Treasury works down the list off competitive bidders, accepting highest bid prices until all securities have been awarded... all lower competitive bids are rejected
* Single-price auction... successful competitive bidders & noncompetitive bidders buy securities at price that equals the highest accepted yield or highest accepted discount rate (i.e. lowest bid)
* Total amount of bids received & total accepted are made available to the public.
* The high, low, & weighted averages of the price, discount rate, and equivalent bond yield of the accepted competitive bids are released to the public
* The weighted average price & yield from the successful competitive bids are applied to the non-competitive tenders
Treasury auctions tail
* In bond market jargon the tail is the distance from the level at which bonds were trading on a when issued basis immediately prior to the auction, to where the Treasury was able to complete the sale. A long tail represents a lack of interest from clients and dealers who would normally underwrite the security.
* It's the spread in price between the lowest competitive bid accepted by the U.S. Treasury for bills, bonds, and notes and the average bid by all those offering to buy such Treasury securities.
