1. Treasury Auctions Sean Bell, Treasury Auction & Low-Card drawing Expert

2. Treasury Auctions So—what is a Treasury Auction?? The tool used by the Federal Gov’t to efficiently raise funds for operating expenses and to service the national debt. Specifically….. A method of selling gov’t securities via U.S. Treasury Department (semi-) public auction. Goal: to maximize price received, while minimizing sales expenses. 2003 auctions = $3.42 trillion total sold

3. Treasury Auctions Why Should You Care? 1) A steady, if unspectacular, investment option 2) U.S. national debt growing exponentially Just keeping up with the interest is a huge cash drain So, the Federal Gov’t has used sales of Gov’t securities to finance deficit spending and associated debt servicing costs How big is the debt?  Take a look at past and present… U.S. Debt Clock U.S. Deficit Growth

4. Treasury Auctions Discussion Topics: 1) What & Why of Treasury Auctions 2) Definitions 3) How an Auction Works 4) Scandal and Evolution

5. Treasury Auctions Definitions: Treasury Bills, Notes, and TIPS (General term = Bonds) Government securities “backed by the full faith and credit of the U.S. Gov’t”  BILLS: Maturity period a year or less  Do NOT pay interest---instead, sell at a discount to “Par” (face) value, then mature at full value---the difference is the yield  The discount determined by the auction  $1 million max purchase per auction per buyer  NOTES: 2-10 year maturity period  Pay fixed interest every 6 months until maturity  TIPS (Treas. Inflation Protected Sec.) are indexed off CPI to adjust interest paid (2X/yr).  5, 10, and 20 year maturity, at present time  BONDS: Bonds no longer sold, though many still maturing— 10 to 30 years. Twice annually interest payments

6. Treasury Auctions Definitions: “ Auctions”---only for the sale of T-Bills, Notes, and TIPS (NOT for U.S. Savings Bonds) Most auctions since 1992 single-price format or “Dutch Auction”; 1998 ALL Silent, conducted electronically today Consist of 2 types of bids: COMPETITIVE & NONCOMPETITIVE Routine, stable, scheduled Treasury’s stated goal is to meet financing needs with the lowest possible cost over time Auction Schedule

7. Treasury Auctions COMPETITIVE BID Typically pro investors, a smaller % of bids Specify rate offered and quantity desired Used to determine the market rate/yield Only those bids at or below the winning bid stop rate will be filled A few other stipulations: see matrix matrix NON-COMPETITIVE Anybody else, that just wants to buy at market Specify only amount desired Accept wherever the market rate ends up: the “bid stop” Deducted from total issue before competitive bids: if enough to cover N-C bids, ALL will filled

8. Treasury Auctions Discussion Topics: 1) What & Why of Treasury Auctions 2) Definitions 3) How an Auction Works 4) Scandal and Evolution

9. Treasury Auctions HOW an AUCTION WORKS: Bidding General Public/Brokers directly through Treasury-Direct electronic money transfer system for individuals Using tender form, mailed to Treasury Primary Dealers Small number (about 30) dealers meeting Fed requirements for trading volumes, stability, etc.  Brokers also able to trade in “when-issued” securities --available pre-auction only to brokers  Helps establish price the auction will go at TAAPS electronically aggregates bids and conducts auction

10. Treasury Auctions HOW an AUCTION WORKS: TAAPS Auction cycle time keeps reducing Several hours in late 1980’s Under two hours early 90’s 2003 goal < 2 minutes Goal is to reduce investor risk by decreasing time from bid to auction; theory is prices higher w/less risk

11. Treasury Auctions Example Auction: Single price, “dutch” auction Lowest yield bid = highest price for treasury Lowest discount = highest price for treasury Treasury auction total issue$10.0 billion Noncompetitive bids$6.0 billion Amount left for competitive bidders$4.0 billion Competitive bids received: A)5.50% (lowest yield/highest price) $750 million B)5.51$750 million C)5.52$750 million D)5.53$750 million E)5.54$750 million F)5.55 (highest yield/lowest price) $750 million

12. Treasury Auctions Example Auction: $10B Securities sold $6B non-competitive: sold at bid stop $4B Competitive: also sold at bid stop 33% of buyers at yield stop allocated before running out No bids at 5.56% or higher accepted AUCTION METRICS:High bid:5.50% Stop Yield:5.55% Awarded at stop:33% Average bid:5.525%

13. Treasury Auctions Other-than-Auction Transactions: Auctions are the Primary Market for gov’t securities…along with the Primary Dealers and “when-issued” securities “wi market” trading from announcement day to day of auction Secondary Market exists to trade previously issued bonds, OTC Primary markets in New York, London, Tokyo Creates continuous, 24 hr. trading

14. Treasury Auctions Discussion Topics: 1) What & Why of Treasury Auctions 2) Definitions 3) How an Auction Works 4) Scandal and Evolution

15. Treasury Auctions Salomon Brothers Scandal: Infamous 1991 attempt by Salomon to corner bond market Fraudulently placed orders in customers’ names Created “significant” overpricing on issue for about 6 weeks (.16-.25%) Interestingly, created situation which probably benefited gov’t But created lack of confidence: back to risk/return…drives down Treasury revenue

16. Treasury Auctions Evolution: Effects of Technology and Procedures drive changes Technology including:  Automated order entry systems  Computerized verification of bidder eligibility Procedures  Response to various scandals, irregularities  Staying current w/ trends (i.e. globalized money markets opening Primary Dealer network to foreign firms in 90’s)

17. Treasury Auctions Evolution Conclusions: Treasury goal to minimize transaction/auction expense Adaptive and willing to use new technology and tools Can be slow to change policies Change seems reactionary

18. Treasury Auctions U.S. Treasury…1784, 1833, and now~ Questions?