How Do Treasury Auctions Work?

At their core, U.S. Treasury auctions aren't all that different from any other public or private auction in your community. Buyers and sellers evaluate what's up for sale and haggle over prices until they agree.  

The only difference between auctioning a bike, a house, or a newly issued Treasury bill or note is the latter typically involves billions of dollars and can move world markets. 

The United States has used debt to help pay for the services it provides since the country was founded. The government still offers a range of securities today, such as Treasury bonds, notes, and bills, also known as T-bonds, T-notes, and T-bills. They vary by factors like the duration of the contract, the size of the offering, and the amount of interest they pay. That last part is important because it determines the return, or yield, an investor gets every year.  

Those Treasuries are known as marketable securities, meaning that after they're sold by the government through Treasury auctions, where individual investors can buy them, they can be resold. Banks and brokers also buy securities at these auctions and then sell them to the public. Nonmarketable securities, such as savings bonds, can't be resold. 

The Treasury holds nearly 300 auctions each year and sells more than $8.3 trillion worth of securities, according to U.S. government data. Interest rates are set at auction, which affects the prices people, banks, and brokers pay the Treasury for the security. 

Until recently, these regularly scheduled sales of government debt were mainly background noise on Wall Street. Then came the pandemic-era interest-rate hikes of 2022 and 2023 that made Treasury auctions significantly more relevant for investors watching the markets.  

The auctions are getting more attention in part because yields are high compared to the last couple of decades and the government's debt and financing needs have grown dramatically. All this means that it's worth learning how they work, who and what they involve, and why they can matter. 

Each quarter, the U.S. Treasury department releases refunding announcements estimating how much debt will be auctioned in the next two quarters and how that debt will be split into various maturities. If the Treasury forecasts it needs to issue more debt than expected, it can cause yields to climb.  

Like the auctions themselves, refunding announcements used to be ignored by most investors but now they draw far more attention. That's because they outline increasing amounts of government debt after major spending increases during and following the pandemic. This has led to worries that investors might demand higher yields, which would possibly weigh on stock prices by making the cost of borrowing higher. 

The amounts auctioned generally reflect how much the Treasury needs to keep the government running. While Congress decides how much to spend in its appropriations process, the revenues that the government earns aren't always consistent. And because the government spends more than it takes in each year, it can't spend money without borrowing. Those who buy the debt at the auctions supply the government the extra money it needs, but they don't do it for free. That's where yields come in.  

The Treasury pays investors for buying its debt, usually in fixed payments every six months (see more below). That's the enticement for holding the debt. Investors can choose to buy debt that matures in time frames ranging from four weeks to 30 years. 

U.S. debt is issued through auctions held by the U.S. Treasury, according to a schedule of announcements and auction dates you'll find on the Econoday Event Calendar on the thinkorswim^® platform. From the MarketWatch tab, select Calendar (green rectangle), the date in question (yellow rectangle), and uncheck all boxes except Econoday event to reveal the time and auction lineup for that day (white rectangles). 

In addition to the thinkorswim platform, you can go to the Treasury's website, which features a tentative auction schedule. The announcement date is typically a day or two before the auction, and the settlement date comes several days after the auction.  

You can also sign up with the Treasury to get a subscription for the auction dates. 

The calendar tells you which security the government is offering at the auction, the amount being offered, the auction date, the issue date, the maturity date, and the closing times for competitive and noncompetitive bidding. The government sells most short-term Treasury bills weekly, but the ones with longer maturities get auctioned less often. 

The government auctions its debt in various forms and most often in the form of Treasury bills. These bills range in duration from four weeks to a year. Less often, the government auctions notes ranging from two years to 10 years and bonds with durations of 20 to 30 years. The yields on these bills, notes, and bonds are fixed, meaning they pay the same rate throughout their lifespan. 

A less common auction is for TIPS, or Treasury Inflation-Protected Securities. They have maturities of five, 10, or 30 years and are designed to protect investors against inflation. Their principal values can rise (or fall) over time, depending on the inflation rate.  

Then there's Floating Rate Notes (FRN), relatively short-term investments that mature in two years and have an interest rate that will likely change or "float" over time. 

Buyers at Treasury auctions cover a wide range. Everyday investors, institutional investors (such as banks), and central banks of foreign countries line up. Anyone can bid for Treasuries through a TreasuryDirect account or through a bank, broker, or dealer. 

Schwab offers Treasuries through the secondary market, where market participants trade Treasuries that have already been issued, or through auctions. Schwab clients can participate in Treasury auctions by logging in to their schwab.com account and going to the Trade tab and selecting Bonds. If this is your first time, you'll need to accept a couple disclosure forms. Next, the Invest in Bonds at Schwab page will automatically appear. Scroll down and select the Treasury Auctions link located under the list of fixed income offerings. When you're ready to invest, you'll get a prompt to fill in the order details including dollar amount and order type.   

For additional information, watch the video link above for details on how this process works. 

Why do banks and investors buy Treasury debt? Fixed income investments generate income and help provide capital preservation, along with portfolio diversification. U.S. Treasuries are backed with the full faith and credit of the U.S. government, meaning they're often considered low-risk investments. 

However, no investment is without risk. Though U.S. Treasuries often don't pay yields as high as riskier corporate or municipal bonds, their prices can fluctuate in the secondary market like any investment. 

Still, the United States has never defaulted on its debt, and the dollar remains the world's reserve currency, both reasons why U.S. Treasury auctions continue to attract both domestic and foreign buyers. That's especially the case lately with yields much higher than they were in the years leading up to the post-pandemic wave of inflation and the U.S. Fed's tightening cycle.  

The Federal Reserve raised its benchmark yield target range to between 5.25% and 5.5% between early 2022 and mid-2023 in one of the fastest rate-increase cycles in U.S. history as it tried to squash four-decade high inflation. 

At the auction, the Treasury first accepts all noncompetitive bids, or those in which the bidder—which can include individuals, partnerships, corporations, foreign monetary authorities, and others—agrees to accept the rate, yield, or discount margin determined at the auction. Then it accepts competitive bids until the entire amount of the offering is awarded. A competitive bid means you specify the rate, yield, or discount margin you'll accept. All successful bidders get the same rate, yield, or discount margin as the highest accepted bid. 

"Yields at an auction will generally be quite close to the yield of issues within the secondary market, usually within a basis point or two," said Collin Martin, director of fixed income strategy at the Schwab Center for Financial Research. "An auction that was, say, five basis points away would be a huge gap." 

The end of a Treasury auction, like the end of a sports game, comes with its own version of a box score. There are a few terms that show up in the results that investors should know. 

Bid-to-cover ratio: This measures demand at the auction, or the ratio of the number of bids received to the number of bids accepted. A higher ratio means stronger demand. 

Tail: This measures the difference between the actual yield awarded in the auction versus the yield in pre-auction trading. A tail can indicate a weak auction, as it did in a November 2023 30-year auction where investors were awarded a higher-than-expected yield, indicating that the government had to offer a premium to entice people to buy. Typically, that's a sign of soft demand, and it can cause Treasury yields to rise when the results flash. The S&P 500^® index (SPX) dropped nearly 1% that day, according to Barron's coverage at the time, hurt by climbing yields that can mean higher borrowing costs that weigh on the economy. 

Primary dealers: The auctions measure the percentage of debt bought by primary dealers who buy the supply not purchased by investors. A high percentage here also can indicate weak auction demand. In that November 2023 30-year auction, primary dealers accepted 24.7% of the debt offered, Barron's reported. 

The Treasury Department regularly updates auction results on its site and lets you look back at recent history to see what each one yielded.  

As of mid-2024, the government's regular auctions hadn't caused yields to spin out of control, despite economic worries at the time. To date, auctions had generated plenty of demand from U.S. and foreign purchasers, and yields have generally been in line with expectations. "We think there are plenty of buyers, and we've seen that with Treasury auctions," Schwab's Martin said. "Really at every auction there's always more potential buyers than bonds that are being auctioned."