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Topic 5

Topic 5. Auctions of Government Debt Securities. Benchmark Treasury Securities. Auctions of Benchmark Treasury Securities. Due to increased borrowing the frequencies have increased. Distribution Procedure for Benchmark Treasury Securities. Example: 2-Year Benchmark Treasury Note Auction.

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Topic 5

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  1. Topic 5 Auctions of Government Debt Securities

  2. Benchmark Treasury Securities

  3. Auctions of Benchmark Treasury Securities Due to increased borrowing the frequencies have increased

  4. Distribution Procedure for Benchmark Treasury Securities

  5. Example: 2-Year Benchmark Treasury Note Auction

  6. When Issued (WI) Trading 2-Year Benchmark Treasury Note Auction April 25, 2007 April 30, 2007 April 23, 2007 WI Trading • WI trades settle on issue date (they are forward transactions) • WI trades occur on “yield basis” between announcement and auction dates • WI trades occur on “price basis” after auction date.

  7. WI Trading – What is the motivation? • WI trading allows for “credible” book building by dealers. It allows them to discover demand for a forthcoming auction. • WI trading is a commitment to deliver securities to customers, even before the auction takes place. Customers get a specified amount at a known price • Dealers with “short” positions prior to the auction are likely to bid much more aggressively in auctions. This is good for the Treasury.

  8. Distribution Procedure for Benchmark Treasury Securities

  9. Results of the hypothetical auction

  10. Results of actual 2-year T-note auction announced in Table 6.2

  11. Results of the hypothetical auction

  12. Results of Discriminatory JGB Auction

  13. Bid shading in Treasury debt auctions

  14. Auction Concessions • With increased size of benchmark auctions, and • increased frequency, governments may have to end up • providing greater concessions to dealers to complete • the distribution process. • In addition, to increased auction frequency and sizes, the • risk capital has also decreased due to bank’s balance sheet • problems and hedge fund failures. This has also resulted • in greater auction concessions.

  15. Behaviour of financing rates around auctions

  16. U.K. Bond Auction Fails for First Time in 14 Years Wall Street Journal, March 26, 2009 The U.K. government failed to find enough buyers in a bond auction for the first time in 14 years, underscoring the market distortions caused by the Bank of England's latest efforts to revive the U.K. economy. Prices of benchmark U.K. government bonds, or gilts, fell Wednesday after the Debt Management Office failed to collect enough bids from investors at an auction of £1.75 billion ($2.57 billion) in 40-year government bonds. The failure will force the government to try again at a later date, or to raise the money by issuing bonds with shorter maturities, which tend to be easier to sell.

  17. U.K. Bond Auction Fails for First Time in 14 Years Wall Street Journal, March 26, 2009 U.S. Treasury also had a rough day; an auction of a record $34 billion in five-year Treasury notes turned in a surprisingly poor result. Sentiment was soured by the gilt auction earlier in the day. The results cast a shadow on central bankers' attempts to tame a rise in yields. The selloff also reflected renewed concern about the U.S. ability to persuade foreign investors to fund its growing deficit.

  18. Session 6 - Conclusions/Main insights • Most governments follow a predictable and orderly auction cycles so that the distribution process is orderly. This is especially important, given the size of issuance. • When-Issued (WI) markets are used to assist in the distribution process in some countries. • Both single price (uniform price) and discriminatory auctions are used by governments. In the United States, only single-price auctions are used for selling government debt. • Bid-shading occurs in auctions – dealers bid at a lower price in auctions and then distribute the securities at a higher price.

  19. Session 6 - Conclusions/Main insights (continued) • With increased auction sizes, and the reduced availability of risk-capital due to the crisis in banking sector and hedge funds, the auction concession has increased in recent times. • Auction cycles (announcement date – auction date – issue date) introduces a pattern in financing rates in Treasury debt markets. • Auctions have failed from time to time, or not bid well enough. This can be a problem for governments with ballooning deficits. They can result in increased interest rates even without a Fed action to increase interest rates.

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