To help finance thenation's debt, the U.S. Treasury department holds regular auctions to sell T-bills, notes and bonds—all known as treasurys.
But are these real auctions in the traditional sense? Who buys the treasurys? How often are the auctions held? CNBC explains.
How do the auctions work?
Unlike an auction at Sotheby's, there's no one at a podium shouting, "What am I bid for this beautiful T-Bill backed by the U.S. government and guaranteed to give you a return on your investment!"
Treasury auctions are handled quite differently.
The process for auctioning bills, notes, and bonds begins with a public announcement by the Treasury. A typical announcement might read that on such and such a date, "The Treasury will auction $11,000 million of 91-day bills to refund $9,000 million of maturing securities and to raise about $2,000 million new cash."
In other words, the Treasury Department is going to sell treasurys with a maturity date of 91 days to pay off other securities that have reached their maturity date and to raise extra cash at the same time.
The announcement is carried by most major newspapers, financial media (like CNBC), and some television stations.
Bids are accepted up to 30 days in advance of the auction, and may be submitted electronically through the Treasury Automated Auction Processing System (TAAPS) and also by mail.
The bids are confidential and kept sealed until the auction date. In an auction, two types of bids can be submitted: Non-competitive tenders and competitive bids.
What are non-competitive and competitive bids?
Non-competitive tenders are generally submitted by small investors and individuals. All non-competitive bidders are guaranteed to receive securities. However, the amount of securities that may be sold to a single non-competitive bidder is limited to no more than $5 million for certain securities.
Competitive bids are usually submitted by bigger investors, like institutional investors and foreign countries. Bidders from this group are restricted to receiving no more than 35 percent of the total amount of securities available to the public.
What specific treasurys are offered?
There are four types that each have different maturity dates, or the date when the principal investment and interest payments are due to be paid. The four are:
- Treasury Bills—maturities of one year or less.
- Treasury Notes—maturities of two to 10 years.
- Treasury Bonds—maturities greater than 10 years.
- Treasury Inflation-Protected Securities (TIPS) —maturities of 10 to 30 years.
Treasury Bonds, Bills, and Notes are all issued in face values of $1,000, though there are different purchase minimums for each type of security.
Who buys treasurys at auction?
Anyone can -- and that includes foreign countries. Most treasurys are bought at auction by the "primary" dealers — that is, financial institutions that are active in buying and selling U.S. government securities.
A much smaller volume of securities is purchased by individual investors who buy them directly from the Treasury Department instead of from banks or brokers. Investors who purchase securities directly from the Treasury avoid commission fees associated with purchases through a dealer.
How are winning bids determined?
The first step the Treasury Department takes is to subtract the non-competitive bids— which automatically receive securities — from the total amount of securities offered.
This is to determine the amount of securities available to the competitive bidders. For example, if $4 billion in non-competitive tenders is received in a $15 billion auction, then $11 billion in securities will be awarded to competitive bidders.
Next,Treasury officials work their way down the list of competitive bids, accepting the highest bid prices until all the securities have been awarded.
The detailed list of accepted and rejected competitive bids is not released to the public, but the total amount of bids received and total accepted are made available.
On issue day, the Treasury delivers securities to bidders who were successfully awarded securities. In exchange, Treasury charges the accounts of those bidders for payment of the securities. The final price, discount rate, and yield is released to the public within two hours of the auction.
How many auctions does the Treasury have?
Treasury auctions are held on a regular basis, generally as follows:
- 13-week and 26-week bills weekly (Mondays)
- 2-year notes monthly
- 5-year notes monthly
- 10-year notes Feb, Mar, May, Jun, Aug, Sept, Nov, Dec
A look at the year 2010 shows there were a total of 310 auctions that raised $8.4 trillion dollars. The Treasury department can schedule more auctions than usually scheduled, if it wants to raise more money.
Why are the auctions important?
The buying of Treasurys gives an indication of the strength of the U.S. economy. Any lack of buying can be tied to the concern that the U.S. economy is growing slowly and that the country would not be able to pay back its debts, though the U.S. has never defaulted on its debt.
Another importance is the impact of Treasury yields. Yields, or the return on investments, are tied to certain interest rates. Yields go down when there is a lot of demand for Treasury products. If yields go up because of a lack of buying — in order to attract more buyers — interest rates for purchasing a home would also go up.