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2008 U.S. Economic Events & Analysis

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52-Week Bill Auction

Definition
In its refunding announcement on April 30, 2008 the Treasury announced that it will begin issuing 52-week bills every four weeks. Treasury notes are sold at regularly scheduled public auctions. Competitive bids at these auctions determine the interest rate paid on each Treasury note issue. Twenty primary dealers (as of November 30, 2007) are authorized and obligated to submit competitive tenders at Treasury auctions. Dealers can hold, resell, or trade the securities with other firms. The Treasury usually announces the size, date and time of the monthly two-year note auction on the third or fourth Monday of each month. The auction takes place the following Wednesday and the securities are issued (settled) on the last day of the month. If the last day is a weekend or a holiday, the securities are issued on the first business day of the following month.

Why Investors Care?
Individual investors can participate in Treasury auctions through a securities dealer or via the Treasury Direct program. Though the Treasury Direct program saves on brokerage commissions, commissions are often nominal and eliminate a lot of paper work and administrative hassle. Brokers facilitate the purchase and sale of Treasuries in the secondary market, which is handy for buying Treasuries at times other than scheduled auctions or with maturities other than those offered by standard new issues.

Interest rates on Treasury securities are determined in the market; the Federal Reserve does not set them. However, bond investors are sensitive to Federal Reserve policy and thus market rates will mirror policy expectations. Usually, bond market players are forward-looking and this means that interest rates on Treasury securities will move in the direction of Fed policy with a lead. As a result, one is more likely to see rising interest rates on Treasury yields during an expansion (and falling yields during economic slowdowns) in advance of policy changes by the Federal Reserve.