Why the U.S. Treasury began auctioning Treasury bills in 1929

The U.S. Treasury began auctioning zero-coupon bills in 1929 to complement the fixed-price subscription offerings of coupon-bearing certificates of indebtedness, notes, and bonds that it had previously relied upon. Bills soon came to play a central role in Treasury cash and debt management. This article explains that the Treasury began auctioning bills to mitigate flaws in the structure of its financing operations that had become apparent during the 1920s. The flaws included the underpricing of new issues to limit the risk of a failed offering; borrowing in advance of actual requirements, resulting in negative carry on Treasury cash balances at commercial banks; and the redemption of maturing issues in advance of tax receipts, resulting in short-term borrowings from Federal Reserve Banks that sometimes led to transient fluctuations in reserves available to the banking system and undesirable volatility in overnight interest rates.Treasury bills

Origins of the Federal Reserve book-entry system

The conversion of U.S. Treasury securities from physical to book-entry form was a major event in the history of the Treasury market. The conversion, which began in 1966, resulted in an automated system that has greatly reduced market operating costs and risks. This article examines the origins and development of the Federal Reserve book-entry system for Treasury securities. It suggests that the system was the product of three important factors: the interest of the Federal Reserve Banks and the Treasury in lowering their operating costs and risks, the intention of the Reserve Banks and the Treasury to preserve the liquidity of the market, and the desire of the Reserve Banks to reduce member bank operating costs. Two critical incidents-a loss of securities at a Reserve Bank in 1962 and an "insurance crisis" in 1970-71-played major roles in the early development and subsequent expansion of the book-entry system.Treasury bonds ; Federal Reserve banks - Automation ; Government securities ; Federal Reserve banks - Costs

The institutionalization of treasury note and bond auctions, 1970-75

The substitution of auctions for fixed-price offerings was expected to lower the U.S. Treasury's cost of financing the federal debt. Despite this and other potential benefits, the Treasury failed in both 1935 and 1963 in its attempts to introduce regular auction sales of coupon-bearing securities. This article examines the Treasury's third and successful attempt between 1970 and 1975. The author identifies three likely reasons why the Treasury succeeded in the early 1970s: it closely imitated its successful and well-understood bill auction process, it extended the maturity of auction offerings gradually, and it was willing to modify the auction process when shortcomings became apparent.Auctions ; Treasury notes ; Treasury bonds ; Debts, Public

The emergence of "regular and predictable" as a Treasury debt management strategy

During the 1970s, U.S. Treasury officials revised the framework within which they selected the maturities of new notes and bonds. Previously, they chose maturities on an offering-by-offering basis. By 1982, the Treasury had ceased these "tactical" sales and was selling notes and bonds on a "regular and predictable" schedule. This article describes that key change in the Treasury's debt management strategy. The author shows that in 1975, Treasury officials financed an unusually rapid expansion of the federal deficit with a flurry of tactical offerings. Because the timing and maturities of the offerings followed no predictable pattern, the sales sometimes took investors by surprise, disrupting the market. These events led Treasury officials to embrace a more regularized program of regular and predictable issuance - a program they had been using for decades to auction bills. The Treasury's switch to regular and predictable issuance of notes and bonds was widely praised for reducing the element of surprise in Treasury offering announcements, facilitating investor planning, and decreasing Treasury borrowing costs.Treasury notes ; Treasury bonds ; Deficit financing ; Auctions

The evolution of repo contracting conventions in the 1980s

Contracting conventions for repurchase agreements, or repos, changed significantly in the 1980s. The growth of the repo market, new uses for repos, and the emergence of new and previously unappreciated risks prompted market participants to revise their contracting conventions. This article describes the evolution of the conventions during that period, focusing on three key developments: the recognition of accrued interest on repo securities, a change in the application of federal bankruptcy law to repos, and the accelerated growth of a new form of repo-tri-party repo. The author argues that the emergence of tri-party repo owed to the efforts of individual market participants acting in their own economic self-interest. By comparison, recognition of accrued interest and the change in bankruptcy law were effected, respectively, by participants taking collective action and seeking legislative relief because uncoordinated, individual solutions would have been more costly. These developments offer important insights into how markets operate: contracting conventions that are efficient in one market environment may have to be revised when the environment changes, and institutional arrangements can change in any number of ways.Repurchase agreements ; Contracts

When the back office moved to the front burner: settlement fails in the treasury market after 9/11

Settlement fails, which occur when securities are not delivered and paid for on the date scheduled by the buyer and seller, can expose market participants to the risk of loss due to counterparty insolvency. This article examines the institutional and economic setting of the fails problem that affected the Treasury market following September 11 and describes how the Federal Reserve and the U.S. Treasury responded. The authors explain that fails rose initially because of the physical destruction of trade records and communication facilities. Fails remained high because a relatively low federal funds rate and investor reluctance to lend securities kept the cost of borrowing securities to avert or remedy a fail comparable to the cost of continuing to fail. The fails problem was ultimately resolved when the Treasury increased the outstanding supply of the on-the-run ten-year note through an unprecedented "snap" reopening. The article also suggests other ways to alleviate chronic fails, such as the introduction of a securities lending facility run by the Treasury and the institution of a penalty fee for fails.Treasury bills ; Government securities ; War - Economic aspects

The Treasury auction process: objectives, structure, and recent acquisitions

Treasury auctions are designed to minimize the cost of financing the national debt by promoting broad, competitive bidding and liquid secondary market trading. A review of the auction process-from the announcement of a new issue to the delivery of securities-reveals how these objectives have been met. Also highlighted are changes in the auction process that stem from recent advances in information-processing technologies and risk management techniques.Auctions ; Government securities ; Treasury bills ; Treasury notes

Explaining settlement fails

The Federal Reserve now makes available current and historical data on trades in U.S. Treasury and other securities that fail to settle as scheduled. An analysis of the data reveals substantial variation in the frequency of fails over the 1990-2004 period. It also suggests that surges in fails sometimes result from operational disruptions, but often reflect market participants' insufficient incentive to avoid failing.Government securities ; Electronic trading of securities

Repurchase agreements with negative interest rates

Contrary to popular belief, interest rates can drop below zero. From early August to mid-November of 2003, negative rates occurred on certain U.S. Treasury security repurchase agreements. An examination of the market conditions behind this development reveals why market participants are sometimes willing to pay interest on money lent.Repurchase agreements ; Interest rates ; Treasury notes