Abstract
Using our unique data set of every U.S. Treasury auction from May 2003 to year-end 2012, we examine the relative importance of market factors vs. auction-specific factors in auction outcomes before and after the onset of quantitative easing in March 2009. We find that prevailing market conditions known in advance of the auction, such as the fed-funds rate, the value of alternative investments (S&P), and market volatility (VIX) are all significant for the auction high-yield. Information embodied in the previous auction of a specific maturity is correlated with the auction high-yield for Bills, implying that the Bills auctions have a forecastable component. Robustness analysis suggests that the Treasury auction market is close to efficient in that the best predictor of an auction high-yield is the market yield on the matched instrument the previous day. However, even so, auction-day innovations matter. Bid-cover is generally significant with higher bid-cover negatively correlated with the auction high-yield. There is some evidence that bidder types (Primary Dealers, Indirect bidders as a proxy for foreign investors, and Direct bidders) vary in their bids, but these results are fragile and depend on model specification. With regard to pre- vs. post-quantitative easing, market structural factors (FedFunds, S&P, VIX) do appear to be differentially correlated with the auction high-yield before and after onset of QE. On balance, the policy of quantitative easing implemented in the secondary market has affected the auction market for U.S. Treasury securities.
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Notes
- 1.
Marketable US debt held by the public, (US Treasury, Monthly Statement of the Public Debt of the United States, December 31, 2012, table 1). Nominal GDP, revised July 31, 2012, Bureau of Economic Analysis, National Income and Product Accounts, table 1. Figures for foreign holdings (table 1) and foreign official holdings (tables 10, 11) from U.S. Treasury, Foreign Portfolio Holdings of U.S. Securities June 2012, April 30, 2013. Federal Reserve holdings, Table H.4.1.
- 2.
During 2012, the Federal Reserve implemented the Extended Maturity Program, in which it sold shorter-term maturities Treasuries (0–3 years) for longer-term maturity Treasuries (6–30 year) while keeping the total dollar value the same. At the end of 2012, the Federal Reserve initiated so-called QE3, by resuming the purchase of long-term US Treasuries from the market at the pace of $45 billion per month.
- 3.
Competitive bids vastly out-weigh non-competitive bids: for example, at the October 14, 2010 auction competitive bids were $32 billion and non-competitive bids were $12 million.
- 4.
The specific institutions that are direct bidders can change over time. The current list can be found at: http://www.newyorkfed.org/markets/pridealers_current.html accessed May 25, 2012.
- 5.
Quoted from Public Debt News, footnotes.
- 6.
http://www.newyorkfed.org/research/current_issues/ci13-1.pdf. See Fleming (2007).
- 7.
According to Reuters, as of June 2011, China’s official purchasing representative has unique and direct access to the auction process and may, therefore, no longer be classified in the Indirect bidder class. http://www.reuters.com/article/2012/05/21/us-usa-treasuries-china-idUSBRE84K11720120521. It has also been noted that China had, in the past, divided up its bids to various Primary Dealers to bid on its behalf so as to mask the specific magnitude of their bids. Rule changes in 2009 altered this behavior. Finally, during 2012, the mapping between Indirect and foreign bidders appeared to weaken. Based on investor-allocation data (which is made public with a delay from the auction date and therefore cannot be used in real time to assess the demand for foreign investors), the foreign share of investors has fallen whereas the hedge fund share of investors has risen. Both could be classified as Indirect bidders. Since our sample ends in 2012, using the Indirect bidder as a proxy for foreign investors would appear to remain valid.
- 8.
The details on the specific characteristics of the individual bids at any auction, and which specific institutions get the allocation from the auction are not publicly available.
- 9.
An auction where the bid-cover ratio is below 1 would be termed a ‘failure’ since the amount bid is less than the amount offered. There is no such auction failure in our sample.
- 10.
Warnock and Warnock assume that foreign official inflows are exogenous, an assumption that Beltran et al. reject. Rudebusch et al. use trending data, which, upon examination by Beltran et al. is shown to yield spurious correlations.
- 11.
The H.15 data are reported as ‘market yield, constant maturity, quoted on investment basis’.
- 12.
It is beyond the scope of this paper to attempt a matching of the secondary market data and the auction data, although this would be an interesting exercise.
- 13.
Estimating the factors underlying the behavior of this variable, as the left-hand side, is put aside for another paper. The point of including this variable in the estimation of the auction high-yield is that the auction-specific information embodied in this variable is known by all bidders going into the auction for maturity j.
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Mann, C.L., Klachkin, O. (2017). U.S. Treasury Auction Yields Before and During Quantitative Easing: Market Factors vs. Auction-Specific Factors. In: Christensen, B., Kowalczyk, C. (eds) Globalization. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-49502-5_11
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