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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" dealers—financial 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
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
Treasury Buyback Program
The Bidding Begins
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 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
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.
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||weekly (Mondays)|
|10-year notes||Feb, Mar, May, Jun, Aug, Sept, Nov, Dec|