Primary Dealers’ Waning Role in Treasury Auctions
In this post, we quantify the macroeconomic effects of central bank announcements about future federal funds rates, or forward guidance. We estimate that a commitment to lowering future rates below market expectations can have fairly strong effects on real economic activity with only small effects on inflation.
Designing effective auctions for treasury securities
Most discussions of treasury auction design focus on the choice between two methods for issuing securities--uniform-price or discriminatory auctions. Although auction theory and much recent research appear to favor the uniform-price method, most countries conduct their treasury auctions using the discriminatory format. What are the main issues underlying the debate over effective auction design?
Going once, going twice, sold: auctions and the success of economic theory
It has been said that, "the value of anything is not what it cost to produce, but what you can get for it at an auction." The U.S. government's proving just that with its auctioning off of telecommunication license.
The institutionalization of treasury note and bond auctions, 1970-75
The substitution of auctions for fixed-price offerings was expected to lower the U.S. Treasury's cost of financing the federal debt. Despite this and other potential benefits, the Treasury failed in both 1935 and 1963 in its attempts to introduce regular auction sales of coupon-bearing securities. This article examines the Treasury's third and successful attempt between 1970 and 1975. The author identifies three likely reasons why the Treasury succeeded in the early 1970s: it closely imitated its successful and well-understood bill auction process, it extended the maturity of auction ...
Credit default swap auctions
The rapid growth of the credit default swap (CDS) market and the increased number of defaults in recent years have led to major changes in the way CDS contracts are settled when default occurs. Auctions are increasingly the mechanism used to settle these contracts, replacing physical transfers of defaulted bonds between CDS sellers and buyers. Indeed, auctions will become a standard feature of all recent CDS contracts from now on. In this paper, we examine all of the CDS auctions conducted to date and evaluate their efficacy by comparing the auction outcomes to prices of the underlying bonds ...
Policy update : A new addition to the Fed's toolkit
Insider rates vs. outsider rates in lending
The presence of private information about a firm can affect the competition among potential lenders. In the Sharpe (1990) model of information asymmetry among lenders (with the von Thadden (2004) correction), an uninformed outside bank faces a winner?s curse when competing with an informed inside bank. This paper examines the model?s prediction for observed interest rates at an inside vs. outside bank. Although the outside bank wins more bad firms than the inside bank, the winner?s curse also causes the outside rate conditional on firm type to be lower in expectation than the inside rate ...
Treasury auctions: what do the recent models and results tell us?
Auctions, as selling mechanisms, have existed for well over two thousand years. Today, one of the most important auction markets in the world is that of U.S. Treasury securities; approximately $2 trillion worth of Treasury securities was auctioned in 1995. ; A long-standing debate has been about selecting an appropriate auction format for various Treasury securities, a format that would be least subject to possible manipulation by individual traders or a cartel and also result in the highest possible revenues for the Treasury. The Treasury is currently experimenting with what is called a ...
Dealers’ Positions and the Auction Cycle
The aftermath of the financial crisis and changes in technology and regulation have spurred a spirited discussion of dealers? evolving role in financial markets. One such role is to buy securities at auction and sell them off to investors over time. We assess this function using data on primary dealers? positions in benchmark Treasury securities, released by the New York Fed since April 2013 and described in this earlier Liberty Street Economics post.
The auctions of Swiss government bonds: should the Treasury price discriminate or not?
Ever since Friedman's (1960) contribution, there has been an ongoing controversy about whether the Treasury should auction off its government debt with a discriminatory or with a uniform price format. Many industrialized countries, the United States or Germany, for instance, use discriminatory auctions, while Switzerland applies to uniform price rule. Using recent contributions to multi-unit auction theory, we analyze data on the bids submitted to Swiss Treasury bond auctions over the last three years. We then construct hypothetical bid functions that would occur under price discrimination. ...