What is a bill auction (in the U.S.) — short definition
A bill auction is the regular public sale through which the U.S. Treasury issues Treasury bills (T-bills). T-bills are short-term government debt that mature within one year (commonly from one month up to 12 months). The Treasury uses these auctions to raise cash and set the market yield for each bill issue.
Key features — quick summary
– Frequency: weekly for most T-bill maturities.
– Format: an electronic Dutch-style auction — all accepted bidders receive the same yield (the clearing yield).
– Participants: retail investors, institutional buyers, and a set of designated primary dealers that must participate.
– Bid types: competitive (price/yield specified) and noncompetitive (accept the auction result).
How the auction works — step-by-step
1. Announcement: Several days before the auction the Treasury posts details — the issue date, auction date, amount offered, and bidding deadlines. Bids may be entered up to 30 days ahead.
2. Submission windows: Noncompetitive bids typically close earlier than competitive bids (noncompetitive usually by 11:00 a.m. ET; competitive usually by 11:30 a.m. ET on auction day). Bids can be placed via TreasuryDirect (for retail investors) or TAAPS (for eligible institutional systems).
3. Types of bids:
– Noncompetitive: the bidder accepts whatever yield the auction produces and is guaranteed an allocation (subject to the minimum purchase). Designed for smaller investors.
– Competitive: the bidder specifies the minimum discount yield (or maximum price) it will accept. These bids are used mainly by institutions. Competitive bidders are not guaranteed allocation and are capped (each bidder generally cannot exceed 35% of the offering).
4. Sorting and clearing: The Treasury ranks competitive bids from lowest yield (cheapest for the government) to highest and accepts them until the offering amount is met. The highest accepted yield among those filling the offering becomes the clearing yield. All winning bidders (competitive and noncompetitive) receive securities at that one yield.
5. Settlement: On issue day the Treasury delivers the bills and charges the purchasers’ accounts for the purchase price, which is quoted per $100 of face value.
Who participates
– Primary dealers: a roster of securities dealers (banks and brokerages) authorized to submit competitive bids and typically required to participate in each auction; they may hold, sell, or trade the bills after purchase.
– Other institutional investors: mutual funds, banks, hedge funds, foreign official accounts, etc., often submit competitive bids.
– Retail investors: can submit noncompetitive bids through TreasuryDirect; guaranteed allocation but must accept the final yield set by the auction.
How allocation and the clearing yield are determined (intuitive explanation)
– The Treasury prefers the lowest possible yields