Treasury auctions and the secondary treasury market
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Treasury Auctions and the Secondary Treasury Market. Treasury Auctions: A Brief History. Treasury issuance of war bonds began as an effort to cover anticipated WWI debt 1917 No outside countries available to borrow from so the debt had to be financed internally

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Treasury Auctions and the Secondary Treasury Market

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Treasury auctions and the secondary treasury market

Zeno Helm: BA 543

Treasury Auctions and the Secondary Treasury Market


Treasury auctions a brief history

Zeno Helm: BA 543

Treasury Auctions: A Brief History

  • Treasury issuance of war bonds began as an effort to cover anticipated WWI debt 1917

    • No outside countries available to borrow from so the debt had to be financed internally

    • Rate and maturity fixed by the government

  • After the war more bonds were issued to cover those now reaching maturity

    • Again government price fixed

    • Oversubscription showed government was overpaying for or undervaluing its debt

  • Auctions were then implemented (1929) to allow for the market to determine the true value of the issued securities


Treasury auctions the basics

Zeno Helm: BA 543

Treasury Auctions: The Basics

What’s the Prize?

Why Auction?

Treasury Securities

Most liquid (readily tradable)

Highest volume of debt in the world

Continually supported by the issuance of new securities

Allows for market demand to set the yield.

Auctions reveal market interest indicated by the “bid-to-cover” ratio.

Treasury department controls timing and quantity of new issues


Types of securities

Zeno Helm: BA 543

Types of Securities


Auction cycles what and when

Zeno Helm: BA 543

Auction Cycles: What and When

  • Treasury Bill Auctions (Discount)

    • 3 and 6-month bills every week

    • 1-year bills every 4 weeks

  • Treasury Note Auctions (Coupon)

    • 2 and 5-year notes monthly

    • 10-year notes quarterly

  • Treasury Bond Auctions

    • 30-year bonds quarterly

  • Reopened Issues

    • Increasing amounts of outstanding issues


The auction process

Zeno Helm: BA 543

The Auction Process


The auction process1

Zeno Helm: BA 543

The Auction Process


Secondary treasury market

Zeno Helm: BA 543

Secondary Treasury Market

  • Trading of outstanding Treasury securities by a group of specialized dealers.

  • “On-the-run” issues replace “off-the-run” issues

  • When issued market – trading prior to Treasury issuance

  • NOTE ON BILL QUOTES:


Secondary market repos

Zeno Helm: BA 543

Secondary Market: Repos

  • “Repurchase agreements” for treasury securities

  • Helps the Federal Reserve control short term interest rates

  • Helps dealers of securities manage liquidity

  • Like a loan, however the ownership of the security actually changes hands from buyer to seller

Repo:

Reverse Repo:


Repo terminology

Zeno Helm: BA 543

Repo Terminology

  • Term Repo vs. Overnight Repo

  • Reversing In vs. Reversing Out Securities

  • Selling Collateral vs. Buying Collateral

  • Repo Rate: Short term loan interest (cost of financing)

    Government Repo

  • System and Customer Repo NOT Buying Collateral

  • Matched Sale NOT Selling Collateral


Questions and maybe answers

Zeno Helm: BA 543

Questions….. And Maybe Answers


Works consulted

Zeno Helm: BA 543

Works Consulted

  • Wikipedia…. Duh

  • Yahoo Finance

  • Foundations of Financial Markets and Institutions – Fabozzi, Modigliani, and Jones

  • Three OSU Finance Professors: to be specifically named based on the quality of the preceding presentation


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