💰🔔 Treasury Auction Process 101

Treasury auctions occur regularly, and ~300 public auctions are held each year. Here's we'll review the auction process, and how to interpret auction results.

First, let's clarify some of these terms: Treasury bills include debt maturing in one year (52 weeks) or less, notes mature in 10 years or less, and bonds have maturities beyond 10yrs. Treasury Inflation Protection Securities (TIPS) and Floating Rate Notes (FRNs) have various maturities. These can all be referred to casually as 'bonds', but traders never refer to anything above 10-years as a 'note'.

First, to participate directly, a bidder must have an established account. Institutions use TAAPS (Treasury Automated Auction Processing System), and individuals use a TreasuryDirect account.

Individuals can only place non-competitive bids, where they agree to accept whatever discount rate (yield) is set by the auction. Institutions, however, can place either non-competitive or competitive bids, where the bidder specifies an interest rate they are willing to accept. In effect, institutions can bargain.

Institutions can also trade in advance of an auction, and then settle with each other when the auction happens. This is called the when-issued market and is pretty important to our discussion, so we’ll talk more about that in a bit.

Once an auction begins, the Treasury first accepts all non-competitive bids and then auctions off the remainder of what it's looking to raise. This is where competitive bidders are unsure whether they'll be filled at their price. The process is called a Dutch auction.

Let's take an example: Say the Treasury wants to raise $100 million in 10-year Notes with a 4% coupon. It receives $10 million of non-competitive bids.

The Treasury first accepts all these non-competitive bids and reduces the amount left for the Dutch auction to $90 million. Then, say it receives the following competitive bids:

• $25 million at 3.88%
• $20 million at 3.90%
• $30 million at 4.0%
• $30 million at 4.05%
• $25 million at 4.12%

The bids with the lowest yield will be accepted first and then ascend up until the auction is filled.

After first accepting $10 million of non-competitive bids, then all competitive bids up to 4.0% ($75 million), then $15 million of the 4.05% bids for $90 million total. So, those who bid 4.05% would receive half of their orders filled.

At auction's end, all bidders receive the same yield at the highest accepted bid. In this case, $100 million of Treasuries were auctioned off at 4.05%

On the face of it, this looks pretty bad, as the Treasury had to offer a higher yield to raise its target amount. But how bad? And how can we tell? The answer lies in the expectations of pricing. Let’s turn to the auction results next to find out how.