8. Rates, bonds and credit

Treasury auctions (AUCT)

AUCT lists upcoming and recent US Treasury auctions with the rate each cleared at, how well it was covered and who bought.

  • 4 min
  • 3 questions
  • Lesson 5 of 6

Why you would care

Is there strong demand for US government debt? The US sells hundreds of billions of dollars of debt every week. If buyers show up weakly, yields jump and the whole curve can move within minutes of the result. A "tailing" 10-year auction is a headline on rates desks.

The idea from scratch

The Treasury sells new debt through auctions. Bidders submit the yield they want; the Treasury accepts the lowest yields first until the amount is filled. The highest accepted yield is the high yield (or rate) and everyone gets that rate.

Types of securities:

TypeMaturityNote
Bill4 weeks to 52 weeksSold at a discount, no coupon
Note2 to 10 yearsPays a coupon twice a year
Bond20 and 30 yearsPays a coupon twice a year
TIPS5 to 30 yearsPrincipal grows with inflation; yield is a real yield
FRN2 yearsFloating rate: pays the bill rate plus a fixed spread

How to judge an auction:

  • Bid-to-cover (B/C)

    total bids / amount sold. 2.5 means bids for 2.5 times the size. Higher means stronger demand.

  • Indirect bidders

    bids placed through dealers for others, mostly foreign central banks and institutions. A high share signals broad demand.

  • Tail

    when the auction rate comes in above the yield traders expected just before the deadline (the "when-issued" yield). A tail means the government had to pay more than expected: weak demand. The opposite is a stop-through.

Diagram: Treasury announces size and date leads to Bids: yields wanted; Bids: yields wanted leads to Accept lowest yields until filled; Accept lowest yields until filled leads to High yield = auction rate; Accept lowest yields until filled leads to Bid-to-cover, indirect share; High yield = auction rate leads to vs pre-auction yield; vs pre-auction yield leads to Tail: weak (higher); vs pre-auction yield leads to Stop-through: strong (lower).
Wide diagram: scroll sideways to see all of it.

See it in Gloom

Gloom screenshot: AUCT, All tab
AUCT, All tab: recent and upcoming Treasury auctions with type, term, rate, bid-to-cover, indirect share and size. Historical example.

open ittype AUCT. Tabs: All, Bills, Notes, Bonds; / searches.

  1. Top rows Sep 29 Bill 52-Week ... $54B with dashes: upcoming auctions, size announced, results not yet in.
  2. Sep 24 Note 7-Year 5.085% 2.42 57.2% $44B: the 7-year sold 44 billion at 5.085%, bids for 2.42 times the size, 57% to indirect bidders.
  3. Sep 23 FRN 4.0bp: a floating-rate note; its "rate" is the spread over the bill rate.
  4. Sep 17 TIPS 9-Year 10-Month 2.653%: a reopened TIPS; the yield is real (after inflation).
  5. Bills cover much more (3.03 for the 6-week) than long notes: short paper is in high demand from money funds.

Practice and recap

Try it3 tasks
  1. Which recent auction had the highest bid-to-cover in the screenshot? (The 6-week bill on Sep 22, 3.03.)
  2. A note auctioned at 4.80% when it traded at 4.78% just before. Tail or stop-through? (A 2 bp tail.)
  3. Why might a TIPS yield (2.65%) be far below a nominal 10-year yield (5.3%)? (TIPS yields are real; the gap is roughly expected inflation plus premia.)
Common mistakes4 mistakes
  • Judging an auction by its yield level alone; compare with the pre-auction yield.
  • Reading a single low bid-to-cover as a crisis: compare with recent auctions of the same term.
  • Forgetting that "9-Year 10-Month" means a reopening of an existing issue.
  • Mixing up FRN spreads with yields.
Check yourself3 questions
  1. What is bid-to-cover?
  2. What is a tail?
  3. Who are indirect bidders, mostly?
Answers
  1. Total bids divided by the amount sold.
  2. The auction clearing at a higher yield than the market expected just before: a sign of weak demand.
  3. Foreign central banks and other institutions bidding through dealers.
Words in this lesson8 words
auction
The sale of new government debt to the highest bidders (lowest yields).
high yield (auction rate)
The yield all winning bidders receive.
bid-to-cover
Bids divided by the amount sold.
indirect bidders
Bidders through dealers, often foreign institutions.
tail / stop-through
Clearing above / below the expected yield.
when-issued yield
The market yield of a new issue before it is auctioned.
FRN
Floating-rate note.
reopening
Selling more of an existing issue.

Educational material about reading market data, not investment advice.