Treasury Auction Yields During Boom , Bust , and Quantitative Easing : Role for Fed and Foreign Purchasers

Since 2007, three actors have been particularly important in U.S. Treasury auctions: The U.S. government, issuing $8.4 trillion in U.S. Treasury securities in 2010 alone; foreign official entities, purchasing $398 billion in U.S. Treasury securities in 2010 alone; and finally the Federal Reserve, which intervened in the U.S. Treasury market by purchasing $900 billion U.S. Treasury securities during 2009 and 2010. Using our unique data set of every U.S. Treasury auction from May 2003 to year-end 2011, we find first, that the yield at auction compared to the previous-day’s matched-maturity instrument varies significantly across the maturity of the instrument, as well as the time period of boom and bust. Similarly, the bid-cover ratios are importantly related to the auction yield and to macroeconomic environment. Third, we find that indirect bidders, a proxy for foreign official entities, although not allocated the largest shares at the auctions, were the relatively more important group in determining the auction yield on longterm U.S. Treasury securities. Finally, we find that all of these relationships change significantly when the Federal Reserve entered the Treasury market. JEL: E43,E58, F34,F49