Auctions and Posted Prices: Selling Treasury Bills

Abstract

In many countries, treasury bills are sold using an auction mechanism. In addition, the treasury also offers the bills for sale after the auction, by posting a price equal to the winning bid in de preceeding auction. Only some players (typically market makers) may buy at this price, and only up to a fraction of the volume that is sold in the auction. At all times, these market makers keep the market for treasury bills liquid by quoting bid and ask prices at which they are willing to enter into a trade. We show that particular conditions exist where the treasury benefits from using a combination of auctions and posted prices, at the same time explaining some stylized facts in the empirical literature on treasury bill auctions.

JEL Classification: D44, G10, G18