New Treasury Securities Auction Process

An article by New York Institute of Finance Fixed Income instructor Bill Addiss.

The process by which new US Treasury Securities are auctioned was first introduced in 1929. Over its life, it has evolved greatly, both in terms of the technology of how the process is conducted and who may participate. Traditionally, this process has been driven by the bond dealers. Specifically, there is a universe of dealers, called Primary Dealers (PDs) who are REQUIRED to participate (bid) for securities at each auction. Each dealer is required to bid for both a minimum, and maximum number of treasuries. Unfortunately, as the amount of securities issued has increased dramatically, thanks to funding the ever growing deficit, the number of dealers has diminished greatly. Obviously this requires each dealer to buy an ever increasing amount of securities. For example, in the 1980’s the U.S. had 47 PDs, now we are down to 22. To help alleviate this burden, and to lessen any taint of collusion among the participants at the auction, the Federal Reserve allows major institutional clients such as asset managers, foreign central banks, and even hedge funds to bid for treasuries in a process called “Direct Bidding”. In doing so, these major institutions can now circumvent the PDs and are even provided the technology to submit bids directly to the Federal Reserve on auction date. This auction platform is called Treasury Automated Auction Processing System (TAAPS)

Over time, this process has enjoyed phenomenal success. For example, in 2008, only 2.5% of treasury issuances were sold directly to investors. Last year, that number grew to 17.7% percent of overall issuances. At the most recent auction of 30 year treasury bonds in 2014, direct bidders bought an unprecedented 24% of the issue at auction. Unlike the PDs who must participate in each auction, the Direct Bidders have the flexibility of choosing whether to participate in the auction, and for how many securities.

However, from the perspective of the PDs this process may, in fact be a victim of its own success. In a report submitted to the Federal Reserve just last week by the Treasury Borrowing Advisory Committee (made up of 15 of the 22 PDs) the dealers are suggesting that this more broad based participation could actually harm the government by raising funding costs.

“As more institutions bid Direct, auction uncertainty rises for the PD system which could potentially lead to increased debt funding costs. Should the privilege of Direct Bidding come with more requirements and transparency? Requirements should be set that induce consistent Direct Bidding participation over the long term”

It should be noted that contrary to the comments above, the more active the participants at ANY auction, the higher the potential auction prices, in this case resulting in LOWER funding for the government. Additionally, perhaps the argument from the committee is more than a little self serving. To the extent that clients can now purchase securities directly from the Federal Reserve, the profit opportunities for the PDs to remarket their recently purchased bonds to these large, important clients are diminished. Additionally, since clients are now buying more securities directly from the Federal Reserve, less capital is required by the PDs at the auction

This debate is only relevant to institutional clients. Retail clients may purchase new issue treasuries directly from the government as well in a process called “Non-Competitive Bidding.” For the retail investor, the benefits of non-competitive bidding, as well as the application to buy treasury securities via this program, can be found at

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