U.S. Treasury Auction. Treasury ----------------------- U.S . Treasury (Government credibility , more flexible to trade ) Goal of Treasury Auction : Government: The Higher price to sell, the better
U.S. Treasury Auction • Treasury -----------------------U.S. Treasury (Government credibility , more flexible to trade) • Goal of Treasury Auction: Government: The Higher price to sell, the better Bidder: as low price as possible to get the bond/note/bill with a certain amount of par value Which kind of financial asset has both the certain amount of payback and the certain amount of time period?
U.S. Treasury Auction Types are clarified by maturity period • Bond-->10Y • 15year quarterly • 20 year quarterly • 30year quarterly • Note—2-10Y • 2year monthly • 5year monthly • 10 year quarterly Bill--<1 Y3month weekly6month weekly1year 4 week http://www.treasurydirect.gov/RI/OFAnnce
Step1. Announcement day Total amount issued to be auctioned Auction Date Each type of maturities
As a qualified bidder(able to access online system ), Longtan wants to bid for a U.S. Treasury • Options to choose: • Tender-------2Billion • (amount I want to buy) • Yield Bid-----2.58% • (minimum yield I can accepted) • 5-year Note
Step. 2 Auction day • Submit before 1:00 pm eastern time • Noncompetitive tender and nonpublic purchase submit before 12:00pm • Amount available to auction = Total amount issued to be auctioned - Noncompetitive tenders(1M limited each) - nonpublic purchase( Treasury reserve )
Auction day • One hour after submission through online system: Available to provide in book entry form @ Federal Reserve Bank Only a receipt to show ownership Ownerships transfer more easier through Bank account
What happen during this one hour? Stop Yield 15 demand “Missed” “Shut out” Assume 10 billion for nonpublic and noncompetitive tender Total Amount available to auction= 40-10=30Billion
Who are qualified to buy in the primary market? Could Longtan able to afford 2 billion? Who can guarantee that I will purchase after I bid for it ? • Nonprimary dealer-----------Longtan(need guarantee) • Primary dealer-------------report to Federal Reserve and continue meet criteria to bid for a certain amount After 1991 Commercial bank -----------Longtan to be customer Qualified broker-dealer --------customer/ to be dealer my own (Possible if I have money)
Conclusion • Step1. get information from announcement day • Step2. Submit request before auction day Step 3. The specific online system run through all requirements and comes to a result based on the process explained on slides 7
Reference: • http://www.treasurydirect.gov/ • http://www.treasury.gov/services/Pages/auctions_index.aspx • http://www.treasurydirect.gov/RI/OFAnnce • http://www.youtube.com/watch?v=WLx1_nynJD0
Frequently ask Q&As? • 1. What is Noncompetitive tenders? Non-competitive tender is for small investors, while competitive tender is for large institutional investors. The price that a non-competitive bidder receives is the average bid price of all competitive bids.
continued • 2. Who will be in the primary dealers? http://newyorkfed.org/research/current_issues/ci13-1/ci13-1.html