Treasury auctions

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 Topics to be Covered


What treasuries are
auctioned

The process of treasury
auctions

Participants involved

Worked through
example

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 Introduction

Treasury securities are issued by RBI to fund
Government expenditure.

Treasury securities include Treasury Bills and
Bonds.

On an annual basis, more then 300 public
auctions occur raising more then 600,000crore
in securities every year.

Most of this debt was raised through treasuries
via the treasury auction system.

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Bills, Notes and Bonds
Treasury bill- are sold in terms ranging from a few
days to 52 weeks. Bills are typically sold at a
discount from the par amount (CMB)

Treasury bond- earn a fixed rate of interest every

six months until maturity. Maturity of more upto
30 years.

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 How often are auctions
held?

Over the years, depending on the economic
climate and the Governments requirements for
funds, there have been changes in the amount,
maturities and frequency with which treasuries
are to be auctioned.

However, auctions are usually held as follows:

T-bills held weekly (Tuesday)

Bonds every Friday

SDL (alternate Thursday)

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 3 stages to the auction
process

1) Announcement

2) Bidding

3) Issuance.

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 Announcement

Auction Calendar

The process begins by announcing that an issue will
occur (RBI).

When an announcement is made, an official document is
made that fully details all the required information,
including:

Amount of the security under sell

Auction date

Maturity date

Terms and conditions of the offering

Customers eligible to participate

Noncompetitive and competitive bidding close times

When Issued Market

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 Bidding

The second step of the Treasury Auction
process is referred to as the ‘bidding’ stage.

Most treasuries are purchased by the
Institutions, Banks and ‘primary dealers’, those
being financial institutions that are active in
buying and selling government securities.

It is important to note that individual investors
too can bid for treasury securities, although
they do so in much smaller quantities.

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 The actual bidding process

All auctions are performed on a competitive bidding basis
and all bids entered by participants must be submitted on
a yield basis.

Electronic Bidding Process

Bids may be submitted between 9.00AM and 12.30PM
for competitive ones, all bids are kept confidential and
are not released until auction time and bids can be
submitted electronically through the E-Kuber system.

There is not necessarily a physical location for the
bidding process.

Two types of bids can be entered: Competitive and non-
competitive.

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 Non-competitive bids

Are small bids by individual investors and some other
approved bidders can place their bids through a primary
member.

They are entered on a quantity basis, not on a yield
basis.

They are guaranteed to receive securities in the auction
(upto 5% of issue amount).

It is for this reason that non competitive bids are
deducted from the total amount of securities being
auctioned by the treasury.

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 Competitive bids

After non-competitve bids have been deducted, the remainder is
to be auctioned to competitive bidders.

Primary dealers then bid yields that they are willing to pay for
the security and the quantity that they want, submitting their
bids literally seconds before the deadline passes via E-Kuber.
The lower the yield bid by the primary dealer, the higher the
price they are willing to pay for the treasury.

Theoretically, primary dealers are not allowed to discuss among
themselves what yield they will be bidding.

Once the deadline passes, the RBI consolidate the bids to
ensure compliance with appropriate regulations

Bids are then arranged by the treasury from lowest yield
(highest price) to highest yield (lowest price).

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Bidding process

Amount bid (billions) Bid yield

BNP Paribas. 0.6 5.65%

Banc of America 0.5 5.66%

Barclays 1 5.67%

SBI. 1 5.68%

Citigroup 1.38 5.69%

HDFC (Shut out) 1.5 5.70%

HSBC (Shut Out) 2 5.80%

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 Stop yield

The highest yield accepted by the RBI is
referred to as the stop yield.

The stop yield is calculated as the yield with
which the Treasury does not need to exceed as
it is the yield that results in the auction amount
being completely filled.

So, in our example before, what is the stop
yield?

Any competitive bids above this stop yield are
‘shut out’ and do not receive any treasuries.

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 A single price auction

The RBI uses both multiple and single priced auction
system, also known as a ‘French and Dutch auction’.

Dutch auction means that all competitors are allocated
securities at the highest yield accepted by the treasury
(stop yield).

That is, all successful competitors are allocated securities
at the same yield, regardless of what yield they bid.

The yield that non-competitors receive is also equal to
the stop yield.

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 A single price auction

Therefore the bid yield put forward by the
primary dealers ultimately determines your
position in the line. Ie the lower the yield you
bid, the more chance you have of your entire
order being filled. But that yield is not the yield
you will be allocated; you will be allocated the
yield that was the highest one accepted by the
Treasury ie the price that just clears the market.

The reason that the RBI employs such a
system, is because empirical studies have
shown that this is the most efficient method that
allows the treasury to raise the most amount of
funds.
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 Taking it one step further

What happens if there is more then one
bidder at the stop yield?

How does the RBI then divide up the
remaining treasuries between these
primary dealers who have bid the exact
same yield?
 This is to be done on a pro rata basis

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 Issuance

Third and final stage of the process

In this stage, RBI issues the treasuries to
the winning bidders.

In exchange, RBI charges the accounts
of the bidders.

Once the securities have been issued,
the results are detailed in an official
document by the RBI .

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