Wednesday, August 26, 2009

An Introduction to Treasury Auctions

It remains to be seen whether the growing U.S. Department of the Treasury auctions will be a relatively quiet sideshow or eventually take the center stage in the ongoing financial crisis. As the number of potential disaster scenarios continues to shrink, one subject that I see receive surprisingly little play in the blogosphere is one of the few remaining potential disasters: the auction of U.S. debt.

The concern is that as the U.S. debt grows, so does the volume of Treasury debt for each auction. The big fear is that at some point the supply of U.S. debt may begin to outstrip the demand. At the moment, China and Japan account for about 2/3 of all foreign holdings of U.S. Treasuries; any plateau in the demand for U.S. debt from these two nations might necessitate higher interest rates to stimulate demand and could send potentially traumatic shock waves throughout the economy. This is the disaster scenario. So far, I am happy to report, demand for Treasuries has been robust and yields have remained at very low levels.

The U.S. Treasury auctions a mixture of Treasury Bills (with maturities from 4 weeks to 52 weeks), Treasury Notes (from 2 to 10 years) and 30-Year Treasury Bonds. The T-Bills are auctioned on what is largely a weekly cycle, with the typical pattern seeing the 13-week and 26-week T-Bills slotted for Mondays and the 4-week and 52-week T-Bills on Tuesdays. Given the frequency of these T-Bill auctions and the relatively low demand from foreign central banks, the T-Bill auctions are probably the least important auctions in terms of being able to gauge market sentiment and the strength of foreign demand.

The more important auctions are of the Treasury Notes, where the 10-Year Note has become the de-facto benchmark for U.S. long-term debt. Treasury Note auctions are best understood as occurring on a monthly cycle, with the 3-Year and 10-Year Notes typically auctioned on Tuesdays and Wednesdays during the second week of each month and the 2-Year, 5-Year and 7-Year Notes typically auctioned off on Tuesdays, Wednesdays and Thursdays of the last week of each month.

The 30-Year Bond and Treasury Inflation Protected Securities (TIPS) are a much smaller part of the Treasury refunding process and are subjects for another post.

The results of Treasury auctions are announced at 1:00 p.m. ET (see Announcement & Results Press Releases) and contain three particularly important pieces of information:

  1. Yield
  2. Bid-to-cover ratio
  3. Percentage of indirect bidders

In short, the yield determines the cost of the debt refunding and/or the price sensitivity of the bidders. The bid-to-cover ratio is simply the total dollar amount of the bids tendered by the total amount of the securities being auction and reflects demand relative to supply. Finally, the percentage of indirect bidders is used as a proxy for demand from foreign central banks, as indirect bids are bids of significant size that do not go through the primary dealer community.

Going forward, investors should keep an eye on the Treasury auctions, particularly on the demand for U.S. Treasury Notes. Should yields start rising, bid-to-cover ratios start falling and participation by indirect bidders begin to decline, then we may have the beginnings of a new kind of debt crisis on our hands.

For additional information on Treasury auctions, try:

For some VIX and More posts on TIPS, readers may wish to check out:


Anonymous said...

Bill, another wild card in the interpretation of any one auction and that is the net amount of new cash raised. One of the July auctions (2/5/7 notes?) where gross less maturing less interest payments resulted in very little net new money. This scenario will be increasingly less likely going forward but must be considered amid reports of an auction "going well" or not.

Anonymous said...

Thanks for the summary, it increased my understanding of debt auctions.

Tyler Craig said...


As a bond ignoramus, I found your post very informative.


Anonymous said...

Uh, who cares about demand when the non-federal federal reserve can just buy all the bonds via an offshore shell corporation and call it "indirect" bidders?

In Debt We Trust said...

There is growing concern that the Fed is allowing foreign central banks to swap their agency bonds for treasuries via offshore vehicles.

Even the recent Fed disclosure court order won't reveal the full identity of the parties.

Anonymous said...

The percentage of stocks that are trading above their 200 day moving average reached over 90.9%, the second highest reading since these statistics were recorded in 1986. The all-time high for this statistic was 94.6% near the beginning of 2004. The stock markets continued for go higher for about 2.5 months before any meaningfull correction took place in the U.S. stock markets in 2004. Based on this, Dow 10000 is likely to exceeded by October 2009. The Treasury actions will not stop this event from occurring.

Fitz said...


Does anybody keep time-series data on the secondary market criteria (coverage, indirect percentage, etc.), for comparison and trend analysis ? Perhaps, even, charts of those desiderata ? That would be most useful.

Eric said...

Is there a way to measure who is buying the debt on an auction by auction basis? It seems that following a major downturn, the investor psychology is risk averse (more than normal). We see that with increased savings rate. Does that increased savings rate translate into Americans buying Treasures? It seems to me that it would.

Steve Schmidt said...

I read your excellent blog re Treas
Auctions. Learned very much. I have grave concerns, however, that the positive reception of Treas offerings will not continue for much longer. Rates will have to increase in order to attract new/future Treas buyers (both Domestic and Foreign). I look forward to your next blog/post.

PW Bailey said...

Excellent post on a topic that I have been watching for some time.
Watch out for a bond auction failure!

Anonymous said...


Regarding your surmise rates will have to increase to attract new Treasuries buyers, I recommend Naufal Sanaullah's excellent post "Game Theory Trading" at "". Naufal theorizes the Fed and the Treasury will choreograph an equities market crash this fall to resurrect panic to bring back the panic trade -- the mass purchase of Treasuries -- to lower rates so the credit reflation can continue. Highly recommended reading.

Bill Luby said...

Great comments on this one. Thanks to all for pitching in here.

Some of my thoughts on what I read above:

1) I agree that something like "net refunding" would be a valuable addition -- or better yet a graphic of refunding-related flows

2) Regarding the issue of indirect bidders and the lack of transparency around how these are accounted for, I tried to address this in my subsequent post

3) With respect to time series data, the best I have seen is from Open Market Operations and Statistics (Zero Hedge), which is one of the links in my next post

4) Finally, thanks for the link to Naufal Sanaullah's Game Theory Trading. Earlier in the year, I was thinking that some dicey government announcements just prior to important auctions may not have been a coincidence.



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