Direct bidding was introduced more than a decade ago by then-Undersecretary of the Treasury Peter R. Fisher, according to Timothy S. Bitsberger, assistant secretary for financial markets at the time. Fisher thought the auctions should be free and open and that forcing institutions to route orders through primary dealers undermined that goal, Bitsberger said. Fisher, now at New York-based BlackRock, declined to comment.
“The system works well for the dealers if all the bidding is channeled through them,” said Bitsberger, now head of official institutions coverage at Paris-based BNP Paribas SA, a primary dealer. “On the other hand, the investors feel, why do they have to give up this information?”
Anonymous Bidders
The Treasury doesn’t reveal the identities of direct bidders. A February analysis by New York Fed Vice President Michael J. Fleming found that other dealers and brokers, investment funds and foreign investors have increased their participation in auctions. The share awarded to depository institutions, pension funds and individuals hasn’t changed.
One strategy for primary dealers is to sell Treasury debt to clients in advance with the intention of buying at a lower price at auction, said the traders. The strategy has failed in some cases when direct bids came at a higher price than dealers hoped to pay, saddling them with a loss, they said. That’s leading traders to become less aggressive in bidding and could result in higher yields at future auctions, some warned.
Dealer Appetite
Dealers have won 22 percent of the securities they have bid for this year through the end of March, compared with 26 percent in 2009, according to data compiled by Bloomberg. Their share of the auctions has shrunk to 46.4 percent from 49 percent in 2009.
The Treasury hasn’t seen any indication that the increase in direct bidding has reduced primary dealers’ appetite at auctions, according to a senior official in the department. The official said firms are still applying for the designation.
Even with record debt, higher demand for U.S. Treasuries has helped suppress borrowing costs as a percentage of the country’s gross domestic product.
“Our basic view continues to be that having broad access to the auction process generates competition,” Matthew Rutherford, assistant Treasury secretary for financial markets, said in an interview.