Treasury Auction

A Treasury auction is the sale of a new issue of marketable Treasury securities by competitive and noncompetitive bidding under the Treasury's Uniform Offering Circular, codified at 31 CFR part 356. Section 356.2 defines an auction as "a bidding process by which we sell marketable Treasury securities to the public," a bid as "an offer to purchase a stated par amount of securities, either competitively or noncompetitively, in an auction," and a single-price auction as one "in which all successful bidders pay the same price regardless of the yields, discount rates, or discount margins they each bid." Treasury's own summary of the result is that "all successful bidders are awarded securities at the same price, which is the price that corresponds to the highest rate, yield, or discount margin of the competitive bids we accept."

The auction is the primary market for Treasury debt. Once the securities are issued they trade in the secondary market between investors, and their prices there move with interest rates; the auction is the one moment at which the Treasury itself is the seller and the price is set by the bids. Treasury bills, notes, bonds, inflation-protected securities and floating rate notes each have their own page describing what the security is and when it is auctioned; this page is about the process they share.

Step one is the announcement, and it controls. Treasury publishes an auction announcement for each sale listing, in the regulation's words, "the specifics of each auction, e.g., offering amount, term and type of security, CUSIP number, and issue and maturity dates," plus the closing times for noncompetitive and competitive bids. The announcement and the regulation together are the terms of sale, and "if anything in the auction announcement differs from this part, the auction announcement will control." Treasury publishes a tentative six-month auction schedule at its quarterly press conferences, usually on the first Wednesday of February, May, August and November, and a weekly list of upcoming announcements, so the calendar is public well in advance.

Two ways to bid, and what each gives up. A noncompetitive bid states a par amount and nothing else; the bidder agrees to accept the rate, yield or discount margin the auction determines. In exchange, the bid is filled in full. Section 356.12 caps a noncompetitive bid at $10 million and bars a noncompetitive bidder from also bidding competitively in the same auction, from holding a when-issued, futures or forward position in the security between the announcement and the results, and from agreeing in advance to sell the securities it is acquiring. A competitive bid states both an amount and a price expressed as a yield (for notes and bonds), a discount rate (for bills, in increments of .005 percent), a real yield (for inflation-protected securities) or a discount margin (for floating rate notes). It may be filled, prorated or rejected entirely depending on where the auction clears. A competitive bidder may bid unlimited amounts at several different yields, but a bid at any single yield above 35 percent of the offering is cut back to that figure, competitive bidding cannot be done through TreasuryDirect, and large bidders must report their net long position in the security when their bids plus that position reach the reporting threshold, typically 35 percent of the offering.

How the awards are decided. Section 356.20 sets the order. Treasury first accepts in full all noncompetitive bids submitted by their deadline. It then accepts competitive bids "at the lowest yields, discount rates, or discount margins, through successively higher yields, discount rates, or discount margins, up to the amount required to meet the offering amount." Because the bids at the highest accepted yield usually exceed what is left to sell, Treasury prorates them: it awards each bidder at that yield the percentage found by dividing the remaining amount by the total bid at that yield, rounded up to the next hundredth of a percent. The highest accepted yield is the auction's clearing level, and in a single-price auction Treasury awards securities "to both noncompetitive and competitive bidders at the price equivalent to the highest accepted yield, discount rate, or discount margin." A competitive bidder who asked for a lower yield than the clearing level gets the clearing level, not the lower yield it bid. The regulation also contemplates multiple-price auctions, in which each competitive bidder pays the price for its own bid and noncompetitive bidders pay the weighted average; the single-price format is the one Treasury's public materials describe.

Two mechanical details that surprise first-time buyers. First, the coupon on a new note or bond is not the auction yield. Treasury sets the interest rate at the multiple of one-eighth of one percent that "produces the price closest to, but not above, par when evaluated at the yield of awards," so a note that clears at 4.170 percent carries a 4.125 percent coupon and is issued at a price slightly below par. If the auction yield comes in below 0.125 percent, the rate is set at one-eighth of one percent anyway and the price is calculated accordingly, which is the mechanism behind the coupon floor the Treasury note and bond pages describe. Second, the price you pay may include accrued interest: in a reopening, the auction of "an additional amount of an outstanding security," or whenever interest starts accruing before the issue date, the settlement amount adds the interest attributable to the days before you owned the security, which you receive back in the first coupon.

Award limits and the bid-to-cover ratio. Section 356.22 caps what any one bidder can take. "The maximum award to any noncompetitive bidder is $10 million," a limit that does not apply to a bidder simply reinvesting the proceeds of a maturing security held directly with Treasury. For competitive bidders "the maximum award is 35 percent of the offering amount less the bidder's net long position"; the regulation's own example is a $10 billion note auction, where the ceiling is $3.5 billion and a bidder already holding $1 billion of the security could be awarded at most $2.5 billion. The $10 million figure is set by the regulation, last amended in 2022, not indexed to anything, so it changes only when Treasury amends the rule. Auction results also report a bid-to-cover ratio, defined as "the total par amount of securities bid for in an auction divided by the total par amount of securities awarded," excluding the Federal Reserve's own bids and awards. A ratio well above 2 means demand comfortably exceeded the offering; it is a measure of the auction, not a prediction about the security's price afterward.

Who bids and how the securities arrive. TreasuryDirect's own statement is that "all auctions are open to the public." Institutions with direct access bid through Treasury's own system; everyone else bids either through a TreasuryDirect account, where only noncompetitive bids are allowed, or through a bank, broker or dealer, which is the only route for a competitive bid. The auction date and the issue date are often days or weeks apart. On the issue date the securities are delivered to the TreasuryDirect account or to the broker, and payment is taken from the designated account. Between the auction and the issue date the security trades on a when-issued basis in the dealer market, which is why the regulation's bidding restrictions refer to when-issued positions.

Treasury announces the offering amount and terms; bidders submit noncompetitive bids naming only an amount or competitive bids naming an amount and a yield; at the closing time Treasury fills the noncompetitive bids, then works up the competitive bids from the lowest yield until the offering is sold, prorating the bids at the highest accepted yield. Every winner pays the price corresponding to that highest accepted yield, the coupon is set at the nearest eighth of a percent at or below it, results are published the same day, and the securities are issued and paid for on the announced issue date.

A hypothetical example. Treasury announces a $10 billion auction of a new two-year note. Noncompetitive bids total $1 billion; every one is filled, leaving $9 billion for competitive bidders. Competitive bids are stacked from the lowest yield up: $3 billion at 4.100 percent, $4.5 billion at 4.150 percent, and $2 billion at 4.170 percent. The first two tiers take $7.5 billion, so $1.5 billion remains to be filled from the $2 billion bid at 4.170 percent. Treasury prorates that tier at 75.00 percent ($1.5 billion divided by $2 billion), so a dealer that bid $200 million at 4.170 percent is awarded $150 million. The high yield is 4.170 percent, and every successful bidder, including the noncompetitive ones and the dealers who bid 4.100 percent, pays the price equivalent to 4.170 percent. The coupon is set at 4.125 percent, the eighth-of-a-percent multiple that produces a price closest to but not above par at a 4.170 percent yield, so the note is issued slightly below $100 per $100 of face value. Under the award limit, no competitive bidder could have taken more than $3.5 billion (35 percent of $10 billion), and one that already held $1 billion of the note through when-issued trading could have taken at most $2.5 billion.

Pros

• A noncompetitive bidder is guaranteed the full amount requested at the same price the largest institutions pay, and with no dealer markup when bought through TreasuryDirect, so an individual buying at auction gets exactly the market-clearing yield.
• The process is public and rule-bound: the announcement, the closing times, the award formula and the results are all published, and the regulation itself is the offering document.
• Reopenings and a fixed calendar mean there is almost always an auction of the maturity an investor wants within a few weeks.

Cons

• A noncompetitive bidder does not know the yield until the results are published; the only way to name a price is to bid competitively through a bank, broker or dealer, and risk getting nothing.
• The coupon is set at an eighth of a percent at or below the auction yield, so a new note is usually issued a little below par, and a reopening adds accrued interest to the price, both of which confuse a first statement.
• The auction price is the market's price on one day. A security bought at auction can trade above or below that price the next day, and a noncompetitive bid offers no protection against buying at a yield that looks low a week later.