US Treasury Auctions

1. US Treasury Auctions Scott Nicol Andrew Burg

2. History of Treasury Auctions • Financing Government Debt • Foreign Government Borrowing • Tax Payer Receipts • Issuance of Government Debt

3. History of Treasury Auctions • Foreign Government Borrowing • Traditional Means of Financing • World War I • Major Lending Countries at War • United States Forced to Fund the War through Increased Taxes and Debt

4. History of Treasury Auctions • Tax Payer Receipts • War Revenue Act of 1917 • Increased Income Tax Rate • Decreased Minimum Tax Rate Income Level

6. History of Treasury Auctions • Issuance of Government Debt • Fixed Price Securities Determined by Government • 1914 Peace Time Debt totaled $968 Million • 1919 Interest Bearing Debt Magnified to $25.2 Billion

7. History of Treasury Auctions • 1920’s - Government Noticed Fixed Price Debt was consistently over-subscribed • Indicated Under-pricing of Issued Debt • 1929 - Explored the British Treasury Bill Market • Important Amendments to Debt Offering System • Securities offered when needed • Auctioned to competitive bidders • First Auction was held for $100 Million in 90 day Bills on December 10th, 1929

8. History of Treasury Auctions • Changes Since 1929 • Treasury Notes and Bonds Still Offered at Fixed Prices until 1970 • By 1983 Auctions were changed to reflect the yield instead of the discounted price • Most significant change came in 1992 with the introduction of the single-price format

9. US Treasury – Big Picture • Finance United States Debt • Current Debt: $10,717,998,123,287.70 (2/5/09) • Goal: Finance government borrowing at the least cost • Issue securities at regular and predictable schedule • Easier for investors to predict future offerings • Factors • Deficit?, economic outlook, maturing issues • Input from primary dealers, general public

10. Auctions • Multiple per week • 2 Types of Bids: • Non-Competitive • Smaller Firms, Individual Investors • Specify amount only • Competitive • Primary Dealers, Institutional Investors • Specify amount wanted and yield • Single Price Auction – All winning bidders get same yield • Let’s try it.

11. Auction • Scenario: Treasury Auction for $30B in 5-yr notes • Bids: Non-Competitive: • $1.0B Competitive: • $4.5B 1.69% • $7.3B 1.70% • $6.5B 1.72% • $8.7B 1.74% • $3.8B 1.75% $2.0B 1.75% • $5.2B 1.76% - Total so far: $28B $2.0B remaining to auction - Pro rata share = $2.0B/$3.8B = 52.6% Total: $30B Stop Yield Price too low—Receive zero …………

12. Why Single Price Auctions? • How can they make sense? (Remember primary goal) • Fundamentally Different than regular auction • Many items, many bidders, many winners • Multiple Price (Traditional) Auctions • Winner’s Curse – causes bidders to bid lower amounts (more cautious) • Single Price Auctions • Fear of winner’s curse eliminated • Bidders bid full reservation price • Less complex = more participation = Demand Higher Price

13. Summary • History of Debt Financing and the Beginning of Auctions • Goal of US Treasury: Finance public debt at least possible cost • Done by auctioning government securities in single price auctions • Single price auctions get Treasury best price for securities

14. Questions???