A Step-by-Step Account of a Treasury Auction

On any auction day for government securities, the lobby of the Federal Reserve Bank in New York becomes a financial battlefield where guts and nerve are deployed in the fight for millions of dollars in profits.

The Treasury is constantly raising new funds for the huge public debt, or repaying old securities that mature. With $2.3 trillion in securities, this guarantees a perpetual stream of auctions for Treasury bills (maturing in three months to a year), notes (two years to 10 years) and bonds (30 years).

Anyone can bid in these auctions, and bids are accepted at 25 Federal Reserve Banks across the country. But the big action is in the New York bank, where 39 primary dealers account for the overwhelming bulk--usually between 75% and 90%--of the successful bids.

The air of tension increases as the 1 p.m. deadline approaches. Traders scribble on a one-page form the bid price and the volume of securities they hope to win. They drop the forms into the slit of a sealed box.

When the deadline has passed, Fed employees take the box to the 8th floor. Officials examine the bids, prepare a sheet listing each bidder, amount and price.

On a special secure phone line, the information is faxed in code to the Treasury in Washington. The sheets from New York and the other Fed locations are combined for a single listing.

First, Treasury officials subtract the non-competitive bids. These have been submitted by individuals and small investment firms. They can buy a guaranteed $1 million worth of securities in any auction if they agree to accept the average price and yield from the auction.

Suppose, for example, the auction covers $15 billion, and $2 billion came from non-competitive bids. This leaves $13 billion to be allocated among the competitive bidders.

Treasury officials approve the highest bids, going down the list until the $13 billion has been awarded.

The primary dealers bidding successfully for the issue then become the distributors to a wide spectrum of customers, big and small.