What Is a Bill Auction?
A bill auction is a public auction, held week by week by the U.S. Treasury, of federal debt obligations — explicitly, Treasury bills (T-bills), whose maturies range from one month to one year. As of May 2021, there are 24 authorized primary dealers who are required to participate in the auction, and bid directly upon each issue. A bill auction is the official way where all U.S. Treasury bills are issued.
Understanding a Bill Auction
The week after week bill auction is actually an electronic Dutch auction. In this sort of proceeding, investors place a bid for the amount of the offering they will buy in terms of quantity and price. The best bid wins, of course, but the offering's price is set after every one of the bids are taken in and sorted, rather than it rising sequentially as bidders consecutively counter one another.
To kickstart the process, an announcement is delivered several days before the auction is to happen. The announcement incorporates information, for example, the auction date, issue date, amount of securities that will be sold, bidding close times, participation eligibility, etc. Bids are accepted as long as 30 days in advance.
When it starts, the bill auction accepts competitive bids to determine the discount rate to be paid on each issue. A group of securities dealers (banks and financiers), known as primary dealers, are authorized and obligated to submit competitive bids on a pro-rata share of each and every Treasury bill auction. The triumphant bid on each issue will determine the interest rate that is paid on that issue. When an issue is purchased, the dealers are allowed to hold, sell, or trade the bills. The demand for T-bills at auction is determined by market and economic conditions.
Who Participates in a Bill Auction?
Participants in any Treasury auction consist of retail investors and institutional investors who submit bids categorized as either competitive or non-competitive tenders. Non-competitive tenders are submitted by more modest investors. In effect, these investors are bidding a bit blind: While they are guaranteed to receive bills, they won't have the foggiest idea about the exact last price or what discount rate they will receive until the auction closes. An investor who submits a non-competitive bid consents to accept the last discount rate, which is determined by the competitive side of the auction.
Competitive tenders are submitted by greater investors, like institutional investors. Every bidder is limited to 35% of the amount of the offering per bill auction. Each bid submitted determines the lowest rate or discount margin that the investor will accept for the debt securities. The bids with the lowest discount rate will be accepted first. The lowest discount rate that meets the supply of debt being sold fills in as the "triumphant" yield or the highest accepted yield, after all non-competitive bids have been subtracted from the total amount of securities offered.
Not at all like the non-competitive bidders, competitive bidders are not guaranteed to receive any T-bills — as approval of their bid relies upon the discount yield that they offered to accept. In the event that their offered price is too low, they might wind up getting locked out of the offering. All investors, competitive and non-competitive, who bid at or over the level of the triumphant yield receive securities with this discount rate.
The non-competitive bid closing time for bills is ordinarily 11:00 a.m. Eastern Time on auction day. The competitive bid closing time for bills is ordinarily 11:30 a.m. Eastern Time on auction day.
How a Bid Auction Works
For instance, assume the Treasury looks to bring $9 million up in one-year T-bills with a 5% discount rate. (The base amount you can buy a bill for is $100, although the most ordinarily sold bills have a par between $1,000 and $10,000.) Let's expect the competitive bids submitted are as follows:
$1 million at 4.79%
$2.5 million at 4.85%
$2 million at 4.96%
$1.5 million at 5%
$3 million at 5.07%
$1 million at 5.1%
$5 million at 5.5%
The bids with the lowest discount rates will be accepted first since the government will like to pay lower yields to investors. In this case, since the Treasury is hoping to raise $9 million, it will accept the bids with the lowest rates up to 5.07%. At this mark, just $2 million of the $3 million bid will be approved. All bids over the 5.07% rate will be accepted, and bids below will be rejected. In effect, this auction is cleared at 5.07%, and all fruitful competitive and non-competitive bidders receive the 5.07% discount rate.
On issue day, Treasury conveys T-bills to non-competitive bidders who made their entries in a particular bill auction. In exchange, Treasury charges the accounts of those bidders for payment of the securities. The purchase price of the T-bill is communicated as a price for every hundred dollars.
- The bill auction is available to the public, both institutional and individual investors; 24 primary dealers — monetary institutions and businesses — are required to participate.
- The lowest discount rate that meets the supply of debt being sold fills in as the "triumphant" yield.
- Treasury bills are issued through an electronic bill auction, which the government conducts each consistently.
- Participants are partitioned into competitive and non-competitive bidders. The competitive bids determine the discount rate to be paid on every T-bill issue. Non-competitive bids are guaranteed to get their securities, though they must accept the rate set by the competitive bids.