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THE US TREASURY BOND AUCTION PROCESS

In contrast to typical bond auctions, the US Treasury also releases details of who buys bonds at auctions, who fall into one of three categories:

  1. Primary Dealers (22 large investment banks that trade with the Treasury)
  2. Indirect Bidders (Institutional investors and foreign central banks who bid by proxy thorough other institutions such as the Reserve Bank of New York)
  3. Direct Bidders (domestic institutions and retail investors)

Of these three types of investor, the actions and behaviour of primary dealers is of greatest significance. This leads to one of the following scenarios occurring, with various implications for the market:

If a large proportion of the auction goes to primary dealers

The implications would be that they then acquire a large supply of bonds they would then go on to sell to their clients, which would be generally viewed as negative for bonds.

If a small proportion of the auction goes to primary dealers

Here, the implication would be that the major buyers of US government bonds would be foreign central banks, who typically sell their own currency to buy dollars, which they then invest in US Treasuries which are commonly regarded as highly safe investment. This is viewed as being a more sustainable form of demand, and therefore would be considered generally positive for bonds.

These considerations should therefore highlight the importance of identifying the entities behind demand in addition to the actual level of demand itself.

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