hey dudes
i know it seems basic but i'm struggling to find the mechanics of a bond auction on google. my best guess is:
- gov't sets yield at which it will auction
- ppl bid for qty based on that yield
is the auction process the same for the fed as it is in say spain?
so in tuesday's spanish bill auction they sold more than expected - was the price set by the gov't for this auction? subsequently the 10yr yield came off - does this mean at thursday's bond auction the set rate will be commensurate with the existing 10yr yield?
pls explain if you know abt this stuff. links to references also appreciated (not that i don't trust ANYONE...hehe..he)
cheers
In the US (not sure about Spain) the steps are: - Treasury sets an amount of debt they are going to auction on a given date - Primary dealers bid on the price they are willing to pay - A single price is set at the lowest amount at which all the debt can be sold. All dealers pay this price, even if they had bid higher - This price determines the yield
ok thanks. so assuming spain is different based on media reports that they sold more EUvalue of bonds than expected...anyone know?
the first thing you gotta know is how not to look like a newb. the auction guy is gonna be talking fast, and if you hear a price you can beat, do something discreet to indicate a bid, like touch your nose or tug your earlobe or wiggle your testicles.
"auction guy"
don't forget that the bond auctions trade in what's called the wi-market (short for when issued) which generally takes place in the week prior to the auction, and this is how dealers generally get a feel for the demand for upcoming auctions and how much they need to bid on at the actual auction
The mechanics with an example:
1.- The government decides a bracket of issuance. So they are going to auction between 1 and 3 billions of debt. I expect to sell about 1.5Bn. 2.- Government establishes the coupon. 4%. 3.- Dealers get an amount of time to submit bids before the auction (I think it's one week). 3 bids are submitted, 1Bn@92, 1Bn@96, 1Bn@98 4.- Government decides which bids it's going to fill and which not. Not all at the same price of course, they just decide on a minimum bid (96 for example) and fill all the bids above that. This determines the amount of debt sold and an AVERAGE yield. In our example, dealers B and C would get filled 1Bn each at @96 and 98 respectively. The average yield would be 4'1241% and they would have sold 2Bn.
Point 4 is why saying "I sold more than expected" is complete bullshit. If you fill crappy bids you can raise all the money you want, but you will be increasing the average yield. So in Spain's case, it's true they sold more than expected, but that's because they are paying 2x yield over the previous auction!! This is why the markets have kept punishing the benchmark yield. I mean, a successful auction is if you sell more than expected at a yield lower than expected, which wasn't the case.
Maximus, you described a different auction type than Boothorbust, are you describing the process for Spain? The previous poster is wrong?
Just curious.
A note: "noncompetitive bids" above refer to a bid where someone says "I'm willing to buy x amount of notes at whatever the final price is." This is why these are subtracted from the offering before going down the bid list, because they will be filled regardless of where the stop is.
I described how it works in Spain, and I'm pretty sure all EU countries. Boothorbust is nearly correct about the american way. They all receive the same yield, but it is the minimum yield. Quoting:
"At the close of an auction, Treasury accepts all noncompetitive bids that comply with the auction rules and then accepts competitive bids in ascending order in terms of their rate or yield until the quantity of accepted bids reaches the offering amount. All bidders will receive the same rate or yield at the highest accepted bid."
SBs both, thanks.
excellent assistance lads, thanks heaps. no SBs, but both deserving.
mo SBs mo problems
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