Bill Auction: Definition, How It Works, and How to Participate

Bill Auction: Definition, How It Works, and How to Participate

What is a bill auction?

A bill auction is the U.S. Treasury’s public sale of Treasury bills (T-bills), its short-term debt securities with maturities from a few weeks up to one year. The Treasury issues most short-term bills through weekly electronic auctions. These auctions are open to both institutional and individual investors.

Key points:
* T-bills pay no periodic interest; investors buy at a discount and receive face value at maturity.
* Auctions are electronic and operate as Dutch (single-price) auctions.
* Investors can participate directly through TreasuryDirect or via brokers/primary dealers.

How the auction works

1. Announcement: Several days before an auction, the Treasury publishes the auction date, issue date, amount offered, and bidding deadlines. Bids may be submitted up to 30 days in advance.
2. Bid types:
3. Noncompetitive bids: Smaller investors accept the final yield and are guaranteed allocation (subject to the auction’s limits).
4. Competitive bids: Usually institutional bidders specify the lowest yield (highest price) they will accept. Competitive bids determine the auction’s stop-out yield.
5. Allocation: The Treasury accepts competitive bids starting from the lowest yields until the full amount is allocated. The highest accepted yield (the stop-out or winning yield) becomes the discount rate paid to all successful bidders (both competitive and noncompetitive).
6. Settlement: On issue day the Treasury delivers the bills and debits successful bidders’ accounts. T-bills are quoted and settled in price per $100 of face value; the minimum purchase is $100 (most retail purchases are in $1,000 increments).

The auction is a Dutch-style process: the offering price is set after all bids are collected and sorted rather than by a sequential bidding process.

Participants

• Retail investors: Often submit noncompetitive bids through TreasuryDirect or brokers; guaranteed allocation at the auction-determined yield.
• Institutional investors: Submit competitive bids. Competitive bidders are subject to limits (for example, no more than 35% of an issue in a single bid).
• Primary dealers: A group of authorized banks and broker-dealers required to participate and submit competitive bids for a pro rata share of auctions.

Timing notes:
* Noncompetitive bids typically close at 11:00 a.m. ET on auction day.
* Competitive bids typically close at 11:30 a.m. ET on auction day.

Example (illustrative)

Treasury seeks $9 million in one-year T-bills. Competitive bids received (by amount and proposed yield):
* $1M at 4.79%
* $2.5M at 4.85%
* $2M at 4.96%
* $1.5M at 5.00%
* $3M at 5.07%
* $1M at 5.10%
* $5M at 5.50%

The Treasury accepts bids with the lowest yields first until $9M is reached. In this example, bids up to 5.07% are accepted; at 5.07% only $2M of the $3M bid is filled to reach the $9M target. The stop-out rate is 5.07%, and all successful bidders receive that discount rate.

How bill auctions differ from bond auctions

• Maturity: T-bills are short-term (weeks to 1 year). T-notes and T-bonds have longer maturities (2–30 years).
• Interest: T-notes and T-bonds pay semiannual interest; T-bills are discounted instruments that pay face value at maturity.
• Frequency: Short-term bills are auctioned weekly; longer-term securities are less frequent.
• Secondary market: Bills and bonds can be bought and sold in secondary markets via brokers, giving investors flexibility beyond auction allocations.

How to participate

• Directly: Open an account at TreasuryDirect.gov to submit noncompetitive or competitive bids (individuals typically use noncompetitive bids).
• Through a broker: Brokers can submit bids, buy on the secondary market, or participate via primary dealers.
• Understand limits: Know minimum purchase amounts, bid deadlines, and any allocation limits for competitive bids.

Bottom line

Bill auctions are the Treasury’s routine method for issuing short-term government debt. They use a Dutch auction format in which competitive bids determine a single stop-out yield that applies to all successful bidders. Retail investors commonly participate through noncompetitive bids via TreasuryDirect, while institutional participants and primary dealers submit competitive tenders that set the auction’s discount rate.