U.S. 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 long-term U.S. Treasury securities. Finally, we find that all of these relationships change significantly when the Federal Reserve entered the Treasury market.