Outline o What they are o How they work o Who uses them o History ?

DEBT The U.S. national debt is approximately $ 16.7 TRILLION. We fund this debt through the sale of securities.

Treasury Auctions - What They Are - o Competitive auction o Market to issue new treasury securities o Tool to fund public debt

Securities - Overview - o Backed by the faith and credit of the U.S. Department of the Treasury o “no credit risk” o Large volume o High liquidity o 2 types o Discount – pay at maturity only o Coupon – pay interest every 6 months and principle at maturity

Securities - Types - o There are 4 types of securities currently sold at treasury auctions: o Bills o Notes o Bonds o TIPS

Securities - Treasury Bills - o Mature in 1 year or less o 4, 13, 26, and 52 week maturities, auctioned at different intervals o Discount Securities

Securities - Treasury Notes - o 2, 3, 5, 7, and 10 year maturities, auctioned at different intervals o Coupon securities

Securities - Treasury Bonds - o Mature in 30 years o Quarterly auctions o Coupon securities

Securities - TIPS - o Treasury Inflation Protection Securities o 5, 10, and 30 year maturities

Auction Process - Announcements - o Auctions are announced online with information: o Amount of the security being offered o Auction date o Issue date o Maturity date o Terms and conditions of the offering o Noncompetitive and competitive bid closing times o Other information necessary

Auction Process - Competitive vs. Noncompetitive - o Competitive: o Each bidder is competing for securities at their best yield rate. o No bids > 35% of total offering o Non-competitive: o Based on quantity, not yield o Receive tenders at single-price yield o Up to $1 million face value

Auction Process - Competitive vs. Noncompetitive - Total amount of securities offered Noncompetitive bidsTotal amount of securities auctioned to competitive bidders −=

Auction Process - Auction Methods - o Multiple-Price method o Single-Price (Dutch) method

Auction Process - Multiple-Price - o All accepted bids are given the yield they were bid for

Auction Process - Single-Price (Dutch) Auctions - o starting from the lowest yield bid, all bids are accepted until all the securities are allocated o the highest yield bid accepted is the “Stop Yield” o bidders at the stop yield are awarded a percentage of their tender on a pro rata basis o all bidders above the stop yield are missed or “shut out”

Auction Process - Auction Methods - o Single-price (Dutch) o Multiple-price 3 Volunteers!

Auction PriceAuction Price Which auction method is better for the Federal Reserve?

Treasury Auctions - People - o Any firm can deal in government securities o Only primary dealers can deal directly with the Federal Reserve o Firms must informally report positions and trading volume to be a “reporting dealer” o Reporting dealers become primary dealers when the Federal Reserve determines they meet the criteria

Treasury Auctions - Secondary Markets -  OTC market to trade outstanding securities  Government brokers trade with investing public and other dealer firms

Treasury Auctions - History - o Started in 1929 o only a competitive auction o hand-delivered sealed bids o sold through subscription offerings, exchange offerings, and advance refundings o multiple-price method for auctions

Treasury Auctions - History - o 1947 – allow for noncompetitive bids with a weighted average sale price o 1970 – bids were made by “price” o 1983 – bids were made on basis of yield o 1997 – issuance of TIPS (Treasury Inflation Protection Securities) o 1998 – adopted single-price method for all auctions (Dutch auctions)

Treasury Auctions - History - o competitive and non-competitive bidding o single-price (Dutch) method for all auctions o sells 4 types of securities o Treasury Bills o Treasury Notes o Treasury Bonds o TIPS

Treasury Auctions - Summary - o Treasury auctions are a tool to fund debt through the issuance of government securities o Securities are currently sold as bills, notes, bonds, and TIPS o Currently, treasury auctions allow competitive and noncompetitive bids, in a single-price auction method o Only primary dealers can interact directly with the Treasury, but any firm or individual can purchase securities

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