How does Treasury sell marketable securities?

BillsTreasury bills are short-term securities that mature in 1 year or less from their issue date. Investors pay less than the bills' par or face value, and when bills mature they receive the par or face value. For example, a $1,000 bill might sell at auction for $980. When the bill matures, the investor receives the face value, in this case $1,000. The difference ($20) equals the interest earned.notesTreasury notes are securities that pay a fixed rate of interest every 6 months until they mature, which is when they pay their par value. Treasury notes mature in more than 1 year, but not more than 10 years from their issue date.bondsTreasury bonds are securities that pay a fixed rate of interest every 6 months until they mature, which is when they pay their par value. Bonds mature in more than 10 years from their issue date., TIPSTreasury Inflation-Protected Securities (TIPS) provide protection against inflation to investors who are willing to pay a premium for this protection in the form of a lower interest rate. The principal increases with inflation and decreases with deflation, but does not fall below par value. TIPS pay interest semiannually at a fixed rate. The rate is applied to the adjusted principal, so interest payments rise with inflation and fall with deflation. When it matures, an investor is paid the inflation-adjusted principal or the original principal (whichever is greater), thereby also being protected against deflation., and floating rate notes are sold to institutional and individual investors through public auctions. Auctions are the cornerstone of Treasury's strategy of regular and predictable debt management. Key features are described below:

  • Auctions are announced in advance, http://www.treasurydirect.gov/instit/instit.htm?upcoming.
  • There are two options for bidding: competitive and non-competitive. Under a competitive bid, the investor specifies the yield (the rate of return) that is acceptable to him or her; that bid may or may not actually succeed in purchasing securities. In contrast, a non-competitive bid offers an uncertain yield that depends upon the offers of competitive bidders, but does guarantee that the bidder will receive a specific amount of securities.
  • At the close of the auction, Treasury accepts all non-competitive bids that comply with the auction rules. Competitive bids are then accepted starting with the lowest yields and in order of increasing yields until it has reached the amount needed to borrow. All competitive and non-competitive bidders will receive the same yield as the highest accepted bid.
  • Auction results are posted on Treasury's webpage, http://www.treasurydirect.gov/instit/annceresult/press/press_auctionresults.htm.

For additional information, see the Uniform Offering Circular and the Federal Reserve Bank of New York's (FRBNY) report on the auction process, The Treasury Auction Process: Objectives, Structure, and Recent Adaptations.

Primary dealers are particularly important in the distribution system. Primary dealers are a group of banks and securities broker/dealers selected by the FRBNY that trade in U.S. government securities with the FRBNY to implement monetary policyThe use of reserve requirements, discount rates, and purchases and sales of Treasury securities (open market operations) by the Federal Reserve (the nation's central bank) to affect the rate of growth of the nation's money supply. The goals of monetary policy are to promote maximum employment, stable prices, and moderate long-term interest rates.. All primary dealers are required to participate in all Treasury auctions, and they buy the largest share of Treasury securities at auction. They then sell these securities to other investors in the secondary marketThe marketplace in which marketable Treasury securities (which constitute most debt held by the public, and which can be sold by whoever owns it) are traded. For example, Treasury securities are resold by primary dealers, who purchase large amounts of Treasury securities.. To ensure a liquid secondary market, Treasury limits each competitive bidder to bidding for no more than 35 percent of the offer amount at a single yield or discount rate. As of June 2012, FRBNY reports there are 21 primary dealers. (A list of primary dealers can be found at http://www.newyorkfed.org/markets/pridealers_current.html.)