Economics: Auction bids for treasury bills

[Hend Abuenein]

Hi,

I need help understanding how the single price auction for treasury bills works.

Particularly, there's an example in Schweser notes 2013-Book 2- Page 18.

Would appreciate help.

Thanks

 

[ShaktiRathore]

As far as I know,
Price auction of T bills takes place on online trading platform. A order comes for buying T-bills for a certain price and a set of orders are taken and usually the highest bid qualifies as price. As happens in usual auctions a set of bidders put forward their prices before the auctioneer and the best price qualifies as the price of the item that is being auctioned. Similarly a set of bid prices are taken from a set of buyers of T-bills and the highest price qualifies as the price of T-bills on the trading platform. These finally determines the price of the T-Bill.

thanks

 

[Hend Abuenein]

Hi Shakti,
How are you? I hope you've been doing well.

I'm afraid that's partially correct. The single price auction is not like a usual auction for several reasons:
1- Bidders bid prices in yield quotations, and the higher the yield the lower the price.
2- Bidders don't bid for the whole batch that is offered for sale. So a number of bidders are taken in sets of ascending yields (descending prices) (not one like in usual auctions) in order to cover the whole sale.
3- There's the involvement of non-competitive bids, which are bids made to accept any sale price, for a certain volume of the offered bills. These have to be deducted from the set of bid-for bills.
4- The best price is arrived at by accumulating face value in the bid sets, which will move up in the yields offered, i.e. down in the price. So the highest price that covers the whole batch offered for sale will be chosen, even if it's nearly the lowest price bid.
5- The price chosen as best will apply to all bidders who have bid higher prices, as well as to the non-competitive bidders (hence the term single-price auction). And if a piece of the batch was less than what was bid for by the last single set (this is were I was confused) the piece is divided among the bidders of that set prorata.

Thank you, seems I understood a bit more than I thought I just needed to put it together

 

[SarveshAll]

Hi Hend, although you posted this question long back and probably you already know the answer to it now, but I'll anyways reply for other's assistance. Whatever you wrote above is absolutely correct. Also, the reason why you got confused (Pt 5-) is because on pg 19, The Schweser notes said that all bidders till $28 Bil will get disc rate of 0.1117 which becomes the 'single price' and even the non compet bidders get that price, but after that they said, and this is where they got wrong and people generally get confused, the rest $2Bil unsold at a yield of 0.1104%. The correct yield for all is 0.1117%. do not let this 0.1104% confuse you, it was surely a typo, because , as it says, 'Single Price'