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Treasury Auctions and the Secondary Treasury Markets

Treasury Auctions and the Secondary Treasury Markets. Presented by Taro Nakano. Agenda. Treasury Auction Auction Cycle and Process Bidding Basis Primary Dealers Secondary Market Type of Market Regulation . Auction Cycle. The U.S. Department of the Treasury announces

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Treasury Auctions and the Secondary Treasury Markets

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  1. Treasury Auctions and the Secondary Treasury Markets Presented by Taro Nakano

  2. Agenda • Treasury Auction • Auction Cycle and Process • Bidding Basis • Primary Dealers • Secondary Market • Type of Market • Regulation

  3. Auction Cycle • The U.S. Department of the Treasury announces • the amount of each issue to be auctioned • auction date • maturities to be issued • Two bidding basis • Competitive bidding basis • Noncompetitive bids • Single-price auction

  4. Competitive vs. Noncompetitive Bidding • Noncompetitive bidding • small investors and individuals • Bids are submitted in terms of quantity • guaranteed to receive securities • limited to $1 million per auction for bills and $5 million for coupon issues • Competitive bidding • primary dealers for their own accounts, or on behalf of customers • Bids are submitted in terms of yield or discount rate • Not guaranteed to receive securities

  5. Primary Dealer BNP Paribas Securities Corp.Barclays Capital Inc.Cantor Fitzgerald & Co.Citigroup Global Markets Inc.Credit Suisse Securities (USA) LLCDaiwa Capital Markets America Inc.Deutsche Bank Securities Inc.Goldman, Sachs & Co.HSBC Securities (USA) Inc.Jefferies & Company, Inc.J.P. Morgan Securities LLCMerrill Lynch, Pierce, Fenner & Smith IncorporatedMF Global Inc. Mizuho Securities USA Inc.Morgan Stanley & Co. IncorporatedNomura Securities International, Inc.RBC Capital Markets, LLCRBS Securities Inc.SG Americas Securities, LLC UBS Securities LLC. Feb 2, 2011 data from The Federal Reserve Bank of New York • A bank or securities broker-dealer • may trade directly with the Federal Reserve System ("the Fed") • Non-Primary Dealer • must deposit the amount in cash • must submit in advance an amount equal to the full face value of the securities bid

  6. The Secondary Market • Over -the-counter market • Dealers continuously bid and ask • Virtual 24 hour trading • 3 primary trading location • New York • London • Tokyo • On -the-run issue • Off-the-run issue • Well off-the-run issue

  7. The Secondary Market Contd • When-Issued Market (WI Market) • Announcement Auction • Not exceed 35% in any one auction • Salomon Brothers Scandal 1991 • Government Broker

  8. Regulation of Secondary Market • Exempt from most SEC provisions and rule • No reporting of trade • No need to disclose the bid-ask spread • Make it difficult for customers to monitor the pricing practice

  9. Repo Market • Treasury Security = Collateral for a loan • Repo rate • Rate is less than the cost of the financing • Term of the loan • Overnight repo • Term repo • Repurchase Agreement • Sales price – repurchase price = interest cost of the loan

  10. Summary Process of Treasury Auctions Over -the-counter market WI Market Repo Market

  11. References • Wikipedia • PUBLIC DEBT NEWS -April 12, 2011- (http://www.treasurydirect.gov/instit/annceresult/press/preanre/2011/R_20110412_2.pdf) • Primary Dealers List (http://www.newyorkfed.org/markets/pridealers_listing.html) • Questions?

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