FROM THE OFFICE OF PUBLIC AFFAIRS
April 22, 2004
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Remarks of Under Secretary Brian C. Roseboro before
The Bond Market Association’s Annual Meeting
Good morning. I would like to begin by thanking the Bond Market Association for this opportunity to speak at their annual conference. Treasury enjoys an excellent working relationship with the BMA, a relationship that has benefited the fixed income market and the American taxpayer.
More than 2 ½ years ago Treasury undertook several, long overdue or under emphasized, initiatives intended to improve the primary market for Treasury securities. Through the hard work and efforts of the Treasury and Bureau of Public Debt staffs, the Federal Reserve Bank of
Today I will highlight some of the developments in the auction process and our plans for future improvements. A priority for us is to increase transparency in the information we provide to market participants. I will then discuss some of the recent trends in auction participation and the important role the primary dealers play in the auction process.
The amount of debt we issue through the auction process is massive by any measure. To put this into some context, in FY 2003 Treasury auctioned $3.3 trillion over a total of 196 auctions. These operations support annual fiscal operations of $2 trillion in expenditures.
We know that we must continuously seek to improve the auction services we provide to help meet our objective of lowest cost of financing over time. Our efforts to improve the auction process are based on our belief that regular, efficient and transparent auctions translate into lower Treasury borrowing costs. Further, we maintain that a smoothly operating primary market enhances the liquidity and efficiency of the secondary market for Treasury securities. We have streamlined the auction process and improved the systems that support auction processing. These initiatives are designed to achieve faster, more efficient auctions and to enhance the robustness of the auction processing systems. Underlying these initiatives is the recognition that we need to do everything we can to make your participation in our auctions easier with minimum risk. We hope that our efforts have helped you operate more effectively in the secondary market.
With this in mind, I would like to quickly review how we have translated our beliefs into actions in the primary market and improvements in the auction process. As you are aware, one of our top priorities has been to reduce the time it takes to release auction results. Processing bids and disseminating results more quickly is a win-win situation for both bidders and Treasury. The shorter the auction release time, the less uncertainty you bear - less market risk. In 2000, it took, on average, 27 minutes to release auction results. In August of 2003, we set the goal of today’s standard of consistent release times of two minutes with a variance of plus or minus 30 seconds. We have achieved our goal of faster auction release times with an average release time of 1 minute 35 seconds this fiscal year. The less uncertainty you face, the less you will charge us for the risk of participating in our auctions. This cost savings is passed onto the
As a government issuer, we are obliged to make auctions accessible to all investors and we have an extremely diverse pool of auction participants. There are currently more than 825 investors making use of TAAPSLink (Treasury Automated Auction Processing System), which allows direct auction participation over the internet. TreasuryDirect has made it possible for a larger number of individual investors to participate in our auctions. The average number of investors bidding non-competitively in all Treasury auctions in 2003 was 650 with an average bid size of $769,000. These bids are clearly important to us more for what they represent to us as the issuer of government debt rather than what they represent in meeting the government’s financing needs.
Not inconsistent with our success in improving auction release times is our goal is to do everything possible to get every bid into the auction if possible. We have worked with dealers to establish emergency bidding guidelines and strengthen systems and communication links. We are also working to make bidding at auction more efficient for investors. At the recent February quarterly refunding, we announced that we will begin six-decimal place pricing later this year. This will allow for a more accurate relationship between bid yields and invoice prices in bill auctions. We encourage you to take the necessary steps to ensure that your auction systems are prepared to accommodate this change. (The six-decimal pricing calculation formulas can be found at www.publicdebt.treas.gov/of/ofcalc6decimal.htm
We recognize the need to continuously develop systems improvements quickly, and, with this goal in mind, we have begun to work to completely redesign all of the systems that support auction processing. We expect that this will ultimately lead to easier and faster bid entry, fewer errors in bid submission, and increased flexibility of our auction systems to respond to technological change and new market issues.
There is a broad spectrum of investors already participating in Treasury auctions, from small retail investors to foreign central banks. All of these auction participants are important to us, and we continually seek broader participation because we feel that it is key to maintaining market liquidity and efficiency, two important reasons many investors choose to participate in the Treasury market in the first place.
In response to market participants’ interest in more information about auction participation, Treasury started releasing additional auction bidding statistics in May 2003, providing auction participants with information about how each auction is distributed. Currently that information is released approximately 15 minutes after each auction. We are working to significantly reduce the release time for this addendum within the next 6-8 months.
From the data Treasury has released following the auctions, it is clear that direct bidders play a relatively small role in the auction process, with these investors bidding for and awarded only 2.2 percent of all auctions in 2003. While bringing us a further diverse pool of participants, they are not necessarily the drivers of auction performance.
The second largest category of bidders has been drawing more attention recently. Indirect bidders include foreign central banks and official accounts that tender through the Federal Reserve Bank of
Clearly the largest segment of participants both in terms of bids and awards is the primary dealer community. In 2003, primary dealers bid more than $6 trillion, making up 86 percent of total bids. They were awarded $2.4 trillion, representing 78 percent of total auction awards. I would argue that the primary dealers are responsible for an even greater portion of auction awards than is suggested by looking at only the percentage awarded. This is because they also submit a large volume of bids on behalf of customers, which is currently captured in the indirect bidder data.
The primary dealers are vitally important to the Treasury. Functioning for over 40 years, they are the distribution and support system for Treasury debt. Primary dealers also play a critical role in the price discovery process for each auction. As market makers in the when-issued market, dealers help determine the clearing price at auction. This helps provide all auction participants with a reference price for submitting their own bids. And dealers aid in the distribution of Treasury securities to end users in their role as market makers.
Given the recent market focus on auction participation, I also want to point out that there are other sources of publicly available data on Treasury debt outstanding, auction participation, and holdings of Treasury securities. These include the quarterly Treasury Bulletin (<www.fms.treas.gov/bulletin/>), which contains a breakdown of coupon auction awards by investor type. Additionally, the Monthly Statement of the Public Debt published on the 4th business day of each month by the Bureau of Public Debt (<http://www.publicdebt.treas.gov/opd/opddload.htm>) breaks down Treasury debt outstanding. And the monthly release of Treasury
Outside of the auction process, we have also worked to improve transparency in other areas by providing the public with information about the composition of our debt portfolio and factors that influence our debt management decisions. We have continually worked to improve the flow of information available to all investors on our website. For example, during each quarterly refunding we publish two sets of charts on our website. These charts, as well as the policy statements and other information we publish contain a wealth of information about our strategy for debt management. As with the auction process, we feel that more transparency can only lead to better communication between Treasury and market participants. I encourage all of you to take a look at what is available on our website (http://www.treas.gov/offices/domestic-finance/debt-management/).
Perhaps the most important function the primary dealers play in the auction process is in the meaningful participation they provide. Meaningful participation can be defined by three characteristics; 1) the size of actual auction awards, 2) the size and distribution of underwriting bids, and 3) the consistency with which they provide both.
I have already discussed the size of the dealers’ auction participation, which shows that they are routinely the largest bidders and are awarded the largest amount at auction. When I talk about underwriting bids and support, I am referring to the primary dealers’ total bidding participation at various market rates behind the expected auction clearing price as opposed to simply their awarded amounts.
These underwriting bids play a critical role in the auction pricing process. Auctions do not always stop right at the level expected by market participants or at the prevailing when-issued level. Clearly, having an abundance of these underwriting bids at various rate levels allows for a smooth auction process and helps ensure that the auction gets priced at a level that reflects fundamental supply and demand. The existence of the underwriting bids helps reduce volatility and ensures robust coverage for all of Treasury's auctions. Undoubtedly, robust bidding and healthy coverage for each auction is in the mutual interest of both Treasury and all Treasury market participants.
Looking at recent underwriting experience, there are a number of dealers who consistently provide a large number of underwriting bids at various rate levels above the expected stop out rate. We would like to commend these dealers for their consistent, sizeable underwriting support. But we would like to see this level of commitment from the rest of the dealer community. We encourage all the primary dealers to evaluate critically the underwriting support they provide at auctions, both in terms of consistency and size of their participation.
I cannot emphasize how important the consistency of the primary dealers’ participation is to a successful auction process. While we understand that dealers’ interest in any individual offering may fluctuate, each primary dealer provides some level of participation at each and every auction. This ensures both good coverage and pricing that is aligned with fundamental factors for each auction. The importance of primary dealer's consistency in participation is particularly pronounced in times of heightened market stress or uncertainty. We know that whatever market conditions might materialize, the U.S. Treasury can count on its primary dealers to support the auction process. I want to take this opportunity to thank the primary dealer community for providing this valuable service to the US Treasury market.
As I stated at the beginning of my remarks, for us, continued progress is a necessity. But real and lasting improvements the Treasury market requires continued progress and support by you as well. Treasury intends to do its part to promote efficient auctions by providing regular and predictable issuance, making continuous improvements in the auction systems and processes, and increasing transparency. And we encourage the primary market participants to do their best to ensure a stable auction environment that benefits all participants. We always welcome feedback and comments from you, as open dialog between Treasury and market participants is crucial to a first-rate auction process and fully functioning secondary market. Working together, we will help ensure that the U.S. Treasury market remains the deepest, most liquid, and most efficient market in the world.
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