Bond Auctions

Each week, billions of dollars (or local currency) of government debt securities are sold in auctions to market participants. Central governments want to use the auction mechanism that minimizes both borrowing costs and chances of market manipulation. A liquid secondary market is also pivotal to the success of the auctions. This chapter begins by providing the definitions, mechanism design, bidding process, and method ranking of government debt auctions with a focus on U.S. Treasury auctions. The next section discusses some important issues including the common value assumption, role of private information, and winner’s curse. Large and active markets coexist before and after the auctions, creating possibilities of a short squeeze. When comparing prices in the pre- or post-auction markets with auction prices, the literature documents positive bidder profits (underpricing) on average.