Declaration of auction results, Financial Management

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Typically, there exist two types of bids in the treasury auction process. They are: Competitive bid and non-competitive bid.

A non-competitive bid is a bid an entity submits and which is willing to purchase the auctioned security at the pre-determined yield by the auction process. Normally, individual investors, who are mostly smaller institutional investors, submit a non-competitive bid for purchase of treasury securities. In such case, the bidder submits only the desired quantity but not the yield at which he is willing to purchase the auctioned security. This desired quantity should not exceed $1 million for treasury bills and $ 5 million for treasury coupon securities.

On the contrary, competitive bid is a bid submitted by the bidder in which he specifies the quantity desired and the yield at which he is willing to purchase the auctioned security. Normally, these are the bids the brokers/dealers, depository institutions, and some of the larger money management firms submit.

The auction results are declared after deducting the total non-competitive tenders and non-public purchases from the total securities auctioned. Non-public purchases mean the purchases made by the Federal Reserve itself. The remaining amount after such deduction is meant for distribution among the competitive bidders.

Subsequently, the bids are arranged from the lowest yield bid to the highest yield bid, i.e., the bids are arranged from the highest price to the lowest price. Until the amount to be distributed to the competitive bidders is completely allocated, all competitive bids (starting form the lowest yield bid) are accepted. Further, the highest yield the treasury accepts is referred to as stop yield and bidders at that yield are awarded a percentage from their total tender offer.

In US, all treasury auctions are single-price auctions. In it, all bidders are awarded securities at the stop yield i.e., the highest yield of accepted competitive tenders. This type of auction is termed as 'Dutch auction'. 


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