Not sure if this is testable material (or will come up later in my Level I readings), but more just a general question for the experts out there. The fixed income material talks about the U.S. Treasury auction filling at the highest bid where all the debt can be sold. So, my question is, what advantages are there to placing a competitive bid instead of a non-competitive bid? The only real potential advantages I can think of are: A) Placing a competitive bid at 2% ytm means you’ll only get filled at 2% ytm or better, never less. B) You get some other preferrential treatment over non-comp bids. Are these accurate? Am I missing something? Thanks,
“U.S. Treasury auction filling at the highest bid where all the debt can be sold” - I’m too lazy to look this up, but my understanding was that non-competitive bids were filled at the average price of the succesful competitive bids (which is different from above). “Placing a competitive bid at 2% ytm means you’ll only get filled at 2% ytm or better, never less.” I think you either get filled at 2% or you don’t get filled. Advantages of competitive bid: a) You can get a better price b) You know what price you are paying without writing some blank check agreement c) You can only buy up to $5M in non-competitive bids
Joey, I appreciate your response. Realized I brought my book to work, so this is directly from my schweser notes (book 5, pg. 46) “Regular cycle auction - single price. Under this method the debt is auctioned periodically according to a cycle and the highest price (lowest yield) at which the entire issue to be auctioned can be sold is awarded to all bidders. This is the system used by the U.S. Treasury” So, combining that with your answer… Advantages of competitive bids: A) Can buy in greater quantities (per your $5M max for NC bids) B) Know the maximum price you’ll be filled at. Can potentially be lower if you bid a higher price than what is awarded to all bidders. Anything missing there? Thanks for helping my feel this out.
Alright, I checked this out. They stopped doing it the way I described in 1998. Geez, I feel old. Anyway, I got it right on my CFA exam. Your a) above is correct as it stands. And: "Advantages of competitive bids: A) Can buy in greater quantities (per your $5M max for NC bids) B) Know the maximum price you’ll be filled at. Can potentially be lower if you bid a higher price than what is awarded to all bidders. " looks correct. Just to sound cool, the yield at which all securities are sold is called the “stop-out” yield.
+1 Cool Point to you JDV. Thanks for your help.