Question

Explain the auction process for US Treasury Bills.

Answer 1

Solution:

TBills in US can be bought , sold or transferred after they are originally issued via an auction process. The auction process offers several US Tbills with varying maturities and are generally issued to institutional and individual investors through public auction. These auctions occur regularly and have a predefined schedule. Three steps are generally involved in an auction process and they are:-

1. Announcement of the auction of the process is made and then the institution is allowed to submit a bid for the security either directly through Treasury direct or arrangements to purchase security through a broker, dealer or financial institution. Some of the details that are a part of the auction announcement includes the amount of the security, auction date, Issue date , maturity date, Terms and conditions of the offering, Non Competitive and competitive bids closing time.
2. After the announcement comes the bidding which can be of two types
   1. Competitive: This type of bidding is limited to 35% of the offering amount for each bidder, and its the bidder who specifies the rate, yield or even the discount/premium if applicable.
   2. Non Competitive : This process is limited to the purchase of $5 million per auction. In this process a bidder agrees to accept the rate , yield or discount/ premium at the auction.

• At the end of auction treasury awards all non competitive bids that comply with the auction rules and then accepts the competitive bids in ascending order of their rate , yield or the discount margin until the quantity that is to be awarded bid reaches the offering amount.

3. The final step is the issuance i.e. on the issue day the Treasury delivers the securities to the bidders who were awarded securities in an auction. In exchange, treasury charges for the payments of the securities. Tbills are issued at a discount or at par are paid at par at maturity with the price listed on the auction results press release and is generally expressed as a price per hundred dollars.