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Treasury Auctions and the Secondary Treasury Market

Treasury Auctions and the Secondary Treasury Market. Treasury Auctions: A Brief History. Treasury issuance of war bonds began as an effort to cover anticipated WWI debt 1917 No outside countries available to borrow from so the debt had to be financed internally

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Treasury Auctions and the Secondary Treasury Market

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  1. Zeno Helm: BA 543 Treasury Auctions and the Secondary Treasury Market

  2. Zeno Helm: BA 543 Treasury Auctions: A Brief History • Treasury issuance of war bonds began as an effort to cover anticipated WWI debt 1917 • No outside countries available to borrow from so the debt had to be financed internally • Rate and maturity fixed by the government • After the war more bonds were issued to cover those now reaching maturity • Again government price fixed • Oversubscription showed government was overpaying for or undervaluing its debt • Auctions were then implemented (1929) to allow for the market to determine the true value of the issued securities

  3. Zeno Helm: BA 543 Treasury Auctions: The Basics What’s the Prize? Why Auction? Treasury Securities Most liquid (readily tradable) Highest volume of debt in the world Continually supported by the issuance of new securities Allows for market demand to set the yield. Auctions reveal market interest indicated by the “bid-to-cover” ratio. Treasury department controls timing and quantity of new issues

  4. Zeno Helm: BA 543 Types of Securities

  5. Zeno Helm: BA 543 Auction Cycles: What and When • Treasury Bill Auctions (Discount) • 3 and 6-month bills every week • 1-year bills every 4 weeks • Treasury Note Auctions (Coupon) • 2 and 5-year notes monthly • 10-year notes quarterly • Treasury Bond Auctions • 30-year bonds quarterly • Reopened Issues • Increasing amounts of outstanding issues

  6. Zeno Helm: BA 543 The Auction Process

  7. Zeno Helm: BA 543 The Auction Process

  8. Zeno Helm: BA 543 Secondary Treasury Market • Trading of outstanding Treasury securities by a group of specialized dealers. • “On-the-run” issues replace “off-the-run” issues • When issued market – trading prior to Treasury issuance • NOTE ON BILL QUOTES:

  9. Zeno Helm: BA 543 Secondary Market: Repos • “Repurchase agreements” for treasury securities • Helps the Federal Reserve control short term interest rates • Helps dealers of securities manage liquidity • Like a loan, however the ownership of the security actually changes hands from buyer to seller Repo: Reverse Repo:

  10. Zeno Helm: BA 543 Repo Terminology • Term Repo vs. Overnight Repo • Reversing In vs. Reversing Out Securities • Selling Collateral vs. Buying Collateral • Repo Rate: Short term loan interest (cost of financing) Government Repo • System and Customer Repo NOT Buying Collateral • Matched Sale NOT Selling Collateral

  11. Zeno Helm: BA 543 Questions….. And Maybe Answers

  12. Zeno Helm: BA 543 Works Consulted • Wikipedia…. Duh • Yahoo Finance • Foundations of Financial Markets and Institutions – Fabozzi, Modigliani, and Jones • Three OSU Finance Professors: to be specifically named based on the quality of the preceding presentation

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