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Treasury Auctions

Treasury Auctions. Jake Thompson. Outline. ?. What they are How they work Who uses them 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 -. Competitive auction

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Treasury Auctions

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  1. Treasury Auctions Jake Thompson

  2. Outline ? • What they are • How they work • Who uses them • History

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

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

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

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

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

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

  9. Securities- Treasury Bonds - • Mature in 30 years • Quarterly auctions • Coupon securities

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

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

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

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

  14. Auction Process- Auction Methods - • Multiple-Price method • Single-Price (Dutch) method

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

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

  17. Auction Process- Auction Methods - 3 Volunteers! • Single-price (Dutch) • Multiple-price

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

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

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

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

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

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

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

  25. QUESTIONS ??

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