Treasury Auctions - Can someone answer a question for me?

[BortSimpson]

If I understand this correctly, when the government needs to raise money, they sell treasuries. The Fed holds an auction and buyers (I think mostly foreign governments) bid on these treasuries.

However, I'm pretty sure I heard (on a George Gammon podcast) that the yield of these treasuries depends on how much demand there is for them in the auction. While I know that bond prices and bond yields are inverse, what exactly are the potential buyers bidding on if they don't know what the yield will be? Are they bidding on a "10 year treasury" but don't know what the yield on that treasury is until after the auction is complete???

[Warlord]

If I understand this correctly, when the government needs to raise money, they sell treasuries. The Fed holds an auction and buyers (I think mostly foreign governments) bid on these treasuries.

However, I'm pretty sure I heard (on a George Gammon podcast) that the yield of these treasuries depends on how much demand there is for them in the auction. While I know that bond prices and bond yields are inverse, what exactly are the potential buyers bidding on if they don't know what the yield will be? Are they bidding on a "10 year treasury" but don't know what the yield on that treasury is until after the auction is complete???

The primary dealers do the buying/selling of treasuries:

In the United States, a primary dealer is a bank or securities broker-dealer that is permitted to trade directly with the Federal Reserve System ("the Fed").[3] Such firms are required to make bids or offers when the Fed conducts open market operations, provide information to the Fed's open market trading desk, and to participate actively in U.S. Treasury securities auctions.[4] They consult with both the U.S. Treasury and the Fed about funding the budget deficit and implementing monetary policy. Many former employees of primary dealers work at the Treasury because of their expertise in the government debt markets, though the Fed avoids a similar revolving door policy.[5][6]

The relationship between the Fed and the primary dealers is governed by the Primary Dealers Act of 1988 and the Fed's operating policy "Administration of Relationships with Primary Dealers."[7] Primary dealers purchase the vast majority of the U.S. Treasury securities (T-bills, T-notes, and T-bonds) sold at auction, and resell them to the public. Their activities extend well beyond the Treasury market. For example, according to the Wall Street Journal Europe (2/9/06 p. 20), all of the top ten dealers in the foreign exchange market are also primary dealers, and between them account for almost 73% of foreign exchange trading volume. Arguably, this group's members are the most influential and powerful non-governmental institutions in global financial markets. Group membership changes slowly, with the current list available from the New York Fed.[3]

The primary dealers form a worldwide network that distributes new U.S. government debt. For example, Daiwa Securities and Mizuho Securities distribute the debt to Japanese buyers. BNP Paribas, Barclays, Deutsche Bank, and RBS Greenwich Capital (a division of the Royal Bank of Scotland) distribute the debt to European buyers. Goldman Sachs, and Citigroup account for many American buyers. Nevertheless, most of these firms compete internationally and in all major financial centers

https://en.wikipedia.org/wiki/Primary_dealer

The yields are set by the market:

https://www.investopedia.com/terms/t/treasury-yield.asp

[Brian4Liberty]

If I understand this correctly, when the government needs to raise money, they sell treasuries. The Fed holds an auction and buyers (I think mostly foreign governments) bid on these treasuries.

However, I'm pretty sure I heard (on a George Gammon podcast) that the yield of these treasuries depends on how much demand there is for them in the auction. While I know that bond prices and bond yields are inverse, what exactly are the potential buyers bidding on if they don't know what the yield will be? Are they bidding on a "10 year treasury" but don't know what the yield on that treasury is until after the auction is complete???

Most average investors that want to purchase government bonds at auction put in an order to buy with their brokerage. They will not know what the yield will be until after the auction. IIRC, their yield will be an average that comes from the big players who actually bid specific prices. I am not sure that your average investor can put in a real bid anymore.

Makes it easier to fix the rate. Can’t have those pesky little people making lowball bids (which results in a higher interest rate).

[Brian4Liberty]

The primary dealers do the buying/selling of treasuries:

https://en.wikipedia.org/wiki/Primary_dealer

The yields are set by the market:

https://www.investopedia.com/terms/t/treasury-yield.asp

One caveat. The secondary market will set yields, which can rise or fall as they are traded. The initial auction of Treasury instruments is more murky than that.

[Warlord]

One caveat. The secondary market will set yields, which can rise or fall as they are traded. The initial auction of Treasury instruments is more murky than that.

And the list of primary dealers reads like a who's who of the banksters (most of which are zombie banks kept alive by the Fed).

I have a retail account with Goldman's and the interest they pay is pitiful. They're basically forcing investors into volatile/casino markets. I refuse to play!

[oyarde]

And the list of primary dealers reads like a who's who of the banksters (most of which are zombie banks kept alive by the Fed).

I have a retail account with Goldman's and the interest they pay is pitiful. They're basically forcing investors into volatile/casino markets. I refuse to play!

Only place I have kept money in the past 25 years that pays decent interest is a savings account with my Life Ins co . Currently I can borrow money from my credit union , put it there and make 1 percent more than the interest on the loan . I have not done it but could . When they set the rate for me it is good all year . This yr 4 percent , 25 years ago 6 percent .

[BortSimpson]

The secondary market for rates is basically "after the bonds have already initially been purchased"? In other words, the Primary Dealers have already sold the bonds and now someone else want to buy them? I think I have a sense of how the prices of those bonds trade. Basically, if rates in the current day are different from the rate stated on the bond (the one that is already "out there", already sold by a primary dealer into the marketplace) then the price of the bond will fluctuate to make up for the difference (e.g. if yields in the present day are higher than the yield stated on the bond then you could just buy a "current day" bond with the higher yield. So the seller of the secondary market bond has to charge you less to compensate you).

Is that correct?

I still don't quite understand how the primary market works but I have a rough sense of it (obviously the usual mix of supply/demand sets the rates).

[Warlord]

Only place I have kept money in the past 25 years that pays decent interest is a savings account with my Life Ins co . Currently I can borrow money from my credit union , put it there and make 1 percent more than the interest on the loan . I have not done it but could . When they set the rate for me it is good all year . This yr 4 percent , 25 years ago 6 percent .

That's called arbitration and a good idea oyarde!

Goldman's pay 1.7%

https://www.marcus.com/

[oyarde]

That's called arbitration and a good idea oyarde!

Goldman's pay 1.7%

https://www.marcus.com/

My local bank pays nothing . I could put 10K in a savings there and would not even have to report the interest on my taxes because it would be under 10.00 per yr. Ridiculous. Inflation is two percent a year at least .One of the reasons I started dumping it all into Land , Gold , silver , copper , lead , guns , trees , fruit trees , tools etc

[Bern]

If I understand this correctly, when the government needs to raise money, they sell treasuries. The Fed holds an auction and buyers (I think mostly foreign governments) bid on these treasuries.
...

The US Treasury Department creates and auctions US Treasuries to large banks (foreign or domestic) The Federal Reserve buys US Treasuries from it's primary dealers (big banks). It isn't supposed to buy US Treasuries directly at Treasury Dept. auctions, but it might as well because the primary dealers are just middlemen earning a risk free vig on the deal. This is QE. This is monetizing the debt.

[BortSimpson]

One caveat. The secondary market will set yields, which can rise or fall as they are traded. The initial auction of Treasury instruments is more murky than that.

So when I see a financial website showing that the U.S. 10 year treasury is priced at 0.850, that price is related to the secondary market, not the primary market?

If so, how do they come up with that rate (I'm looking for a high level explanation)? Is it some kind of aggregate of all the 10 year treasuries out there and how they're trading? I'm guessing it's not that because some treasuries might be close to maturing whereas others have the full 10 years to go? But this is the question that I think I was ultimately driving at in my original post. I understand certain things about treasuries but stuff like this (which, seemingly, should be straightforward) seems vague and more complex than I initially thought.

[Brian4Liberty]

So when I see a financial website showing that the U.S. 10 year treasury is priced at 0.850, that price is related to the secondary market, not the primary market?

Exactly. Bonds trade like a stock. There are always asks and bids. Just as you would know what a stock is currently trading at, you can find out what a bond is trading at.

If so, how do they come up with that rate (I'm looking for a high level explanation)? Is it some kind of aggregate of all the 10 year treasuries out there and how they're trading? I'm guessing it's not that because some treasuries might be close to maturing whereas others have the full 10 years to go? But this is the question that I think I was ultimately driving at in my original post. I understand certain things about treasuries but stuff like this (which, seemingly, should be straightforward) seems vague and more complex than I initially thought.

Everything evens out when a bond is traded. The buyer may have to throw in some extra money to the seller that has not yet been paid, to make up for differences in yield. How much longer the bond has to maturity, and the payment schedule are all taken into account.

Example: you buy a $10k bond at auction, and it pays 5%. After a while, rates go down to 4%. If you sell, the buyer will chip in extra cash, which pays you off for your better rate, and lowers the interest the seller gets (net) down to 4%. The value of your bond went up, because interest rates went down.