What Is a Bill Auction?
Let me tell you directly: a bill auction is a public auction held weekly by the U.S. Treasury for federal debt obligations, specifically Treasury bills or T-bills, with maturities ranging from one month to one year.
As of May 2021, there are 24 authorized primary dealers—financial institutions and brokerages—that must participate and bid directly on each issue. This is the official way all U.S. Treasury bills are issued.
Key Takeaways
Treasury bills get issued through an electronic bill auction that the government runs every week. The auction is open to everyone, from institutional to individual investors, and those 24 primary dealers are required to join in.
You'll find participants split into competitive and noncompetitive bidders. The competitive ones set the discount rate for each T-bill issue, while noncompetitive bidders are guaranteed their securities but have to accept whatever rate the competitive bids establish.
The lowest discount rate that covers the debt supply becomes the winning yield.
What Is a Bond Auction?
A government bond auction involves selling short- and long-term government bonds to investors to keep the cost of financing national debt as low as possible. Both bond and bill auctions are methods for the government to sell debt securities and fund the national debt, but they have key differences.
On maturity, T-bills are the shortest, from four weeks to a year; Treasury notes mature in two to 10 years, and Treasury bonds in 20 to 30 years. Auctions for most short-term T-bills happen weekly, but longer-term ones are less frequent.
Bid types include competitive and noncompetitive in bond auctions, while in bill auctions, the Treasury delivers T-bills to noncompetitive bidders on issue day. Interest payments come twice a year for T-bonds and T-notes, but T-bills just earn face value at maturity.
If you buy T-bills through a broker on the secondary market, you get more control over your investments.
Understanding a Bill Auction
The weekly bill auction operates as an electronic Dutch auction. Here, investors bid on the amount they're willing to buy, specifying quantity and price. The best bid wins, but the price gets set after collecting and sorting all bids, not by sequential increases as bidders counter each other.
To start, an announcement comes out several days before the auction, covering details like the auction date, issue date, securities amount, bidding close times, and eligibility. You can submit bids up to 30 days in advance.
Once underway, the auction takes competitive bids to set the discount rate for each issue. Primary dealers—those authorized banks and brokerages—must submit competitive bids on a pro-rata share of every auction.
The winning bid sets the interest rate for that issue. After purchase, dealers can hold, sell, or trade the bills. Demand at these auctions depends on market and economic conditions.
Remember, all bill auctions are open to the public via TreasuryDirect or the Treasury Automated Auction Processing System (TAAPS).
Who Participates in a Bill Auction?
Participants include retail and institutional investors submitting bids as competitive or noncompetitive tenders. Smaller investors typically go for noncompetitive tenders, where they're guaranteed bills but won't know the final price or discount rate until the auction closes.
They agree to accept whatever discount rate the competitive side determines. Bigger investors, like institutions, submit competitive tenders, limited to 35% of the offering per auction.
Each competitive bid specifies the lowest rate or discount margin they're willing to accept. Bids with the lowest discount rates get accepted first, and the lowest rate that meets the debt supply becomes the winning yield after subtracting noncompetitive bids.
Competitive bidders aren't guaranteed anything—their success depends on their offered discount yield. If it's too low, they might get nothing. All successful bidders, competitive or not, get securities at the winning discount rate.
Note that noncompetitive bids close at 11 a.m. Eastern time on auction day, and competitive ones at 11:30 a.m.
How a Bill Auction Works
Take this example: suppose the Treasury wants to raise $9 million in one-year T-bills with a 5% discount rate. The minimum buy is $100, but most bills have a par from $1,000 to $10,000.
Competitive bids might come in like: $1 million at 4.79%, $2.5 million at 4.85%, $2 million at 4.96%, $1.5 million at 5%, $3 million at 5.07%, $1 million at 5.1%, $5 million at 5.5%.
The government accepts the lowest discount rates first to pay lower yields. To hit $9 million, it takes bids up to 5.07%, approving only $2 million of the $3 million at that rate. Bids above 5.07% get rejected.
The auction clears at 5.07%, and all successful bidders—competitive and noncompetitive—get the 5.07% discount rate. On issue day, the Treasury delivers T-bills to noncompetitive bidders and charges their accounts, with prices per hundred dollars.
The Bottom Line
The U.S. Treasury runs bill auctions every week as public sales of Treasury bills with maturities from one month to one year. This is how the government issues these short-term debt obligations.
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