U.S. Treasuries in 2013
The US Treasury Department issues Treasury securities of varying maturities to finance government debt. The yield on these securities is determined through a public auction process, where securities are offered for sale to institutional and individual investors. The purpose of the auctions is to obtain financing from the market at the most competitive cost. In 2013, the U.S. Treasury Department issued ~$2.7 trillion worth of marketable securities at 267 auctions.
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There are three steps involved in a Treasury auction.
1. Announcement of the auction
Auction announcements include the type of security to be auctioned, the date and time of the auction, the issue and maturity dates, closing times for competitive and non-competitive bids, the terms and conditions of the auction, and other relevant information.
2. Bidding for the Treasury securities on sale
There are two types of bids for Treasury securities: competitive and non-competitive. Under competitive bids, the bid size for each bidder is limited to 35% of the offering amount, with the bidder specifying the yield, rate, or discount applicable to the bid for the security. A non-competitive bid accepts the rate, yield, or discount determined at the Treasury auction and is limited to purchases of $5 million per auction. A non-competitive bid is also guaranteed to receive the full amount of the security bid.
The Treasury department then accepts bids in order from highest yielding onwards until the offering amount is equal to the bids. Then all non-competitive and competitive bids are issued securities at the rate, yield, or discount margin of the highest bid.
3. Issuance of Treasuries
On the stated issue day, the Treasury awards the securities to successful bidders and charges their accounts for their delivery.
The yields determined at Treasury auctions are relevant for U.S. government-issued debt (TLT, IEF) as well as debt issued by corporates, like General Electric (GE) and Nike (NKE), or other sovereign nations (PCY). They’re often quoted as a spread over and above the rate represented by the lowest-risk debt securities, U.S. Treasuries.
To read more about the Treasury auction process, move on to Part 3 of this series.