Indirect Bidder

What Is an Indirect Bidder?

An indirect bidder, generally a foreign entity, purchases Treasury securities at auction through an intermediary, for example, a primary dealer or broker.

The U.S. government consistently issues debt securities or bonds to finance the federal government's borrowings. The U.S. Treasury Department auctions different types of securities consistently. These securities are purchased by foreign governments, central banks, investment funds, and individual investors. During each auction, the Treasury department accept bids through its automated system called the Treasury Automated Auction Processing System (TAAPS).

A direct bidder is an individual or organization that purchases Treasury securities during an auction for themselves or their home account. On the other hand, an indirect bidder is the point at which an individual or customer places a bid through another party. For instance, foreign and international monetary authorities, such a central banks, often place bids for Treasury securities indirectly through another entity.

Understanding Indirect Bidder

Indirect bidders are customers putting competitive bids at U.S. Treasury auctions through primary dealers and can incorporate foreign central banks and domestic money managers.

The Treasury Department permits indirect bidders to place bids on a competitive and noncompetitive basis. A noncompetitive bid doesn't need the bidder to indicate the ideal yield or rate of return. The Treasury accepts these bids first and afterward fills competitive bids, starting with the accommodation requesting the lowest yield. In a competitive bid, the bidder must determine their ideal return, with the dollar amount of securities.

At the auction's end, the Treasury Department reports the dollar amount of securities bought by primary dealers, direct bidders, and indirect bidders. During the 2000s, the department tried to be really forthcoming and honest about where the auction bids were all approaching from (i.e., who was buying U.S. debt). This clarification additionally uncovers what the type of recommendations made means for variations in purchases, particularly foreign investments.

There are different types of securities that are sold at a Treasury auction. Treasury notes (T-notes) are securities with maturities of over a year but not over ten years. Then again, Treasury bills (T-bills) have original maturities of one year or less. Treasury inflation-protected security (TIPS) are bonds that adjust their value in view of a inflation index, which assists investors with keeping up with rising prices in the economy. As inflation increases, the interest payments for a TIPS security increases, and when inflation diminishes, the interest payment for a TIPS security diminishes.

Indirect Bidder and Foreign Investors

Treasury security purchases by indirect bidders are a proxy for investments made by foreign investors. They assist the Treasury Department with measuring the eagerness of foreigners to continue purchasing U.S. debt. Foreign entities make up a significant portion of the ownership of outstanding Treasury securities. The eagerness of these organizations to continue buying securities significantly affects the ability of the Treasury to raise funds.

Illustration of Indirect Bidder

The following is a table from the U.S. Treasury showing the bidding interest for the different auctions in Q2 2020. It outlines the percentage of bidders who were primary dealers, direct bidders, and indirect bidders.

• During the Treasury auction, 59.3% of the bidders were indirect bidders for the 10-year Treasury note.
• For the 30-year bond, 64.5% were indirect bidders.
• Interestingly, indirect bidders represented 68.6% of the bidders for the 10-year TIPS security.
• For the 30-year TIPS bond, 73.7% were indirect bidders.

Investors often attempt to interpret sentiment in the bond market by dissecting Treasury auction results. For instance, the interest in TIPS by indirect bidders could mean that foreign investors and foreign central banks expect inflation to increase before long. Of course, the results from one auction doesn't determine a trend. Instead, investors ought to compare the bidding results from multiple Treasury auctions to assist with determining whether the bidding interest for specific Treasuries is expanding or decreasing.

Highlights

• An indirect bidder, normally a foreign entity, purchases Treasury securities at auction through an intermediary, like a dealer or broker.
• Treasury security purchases by indirect bidders are a proxy for investments made by foreign investors assisting with checking foreign demand for U.S. Treasury securities.
• The Treasury Department permits indirect bidders to place bids on a competitive and noncompetitive basis.