# Bill Auction: Definition, How It Works, and How to Participate

## What Is a Bill Auction?

A bill auction is a public [auction](https://www.investopedia.com/terms/a/auction.asp), held weekly by the U.S. Treasury, of federal debt obligations—specifically, [Treasury bills (T-bills)](https://www.investopedia.com/terms/t/treasurybill.asp), whose maturities range from one month to one year.

As of May 2021, there are 24 authorized primary dealers who are required to participate in the auction, and bid directly upon each issue. A bill auction is the official manner in which all U.S. Treasury bills are issued.

### key takeaways

*   Treasury bills are issued through an electronic bill auction, which the government conducts every week.
*   The bill auction is open to the public, both institutional and individual investors; 24 primary dealers—financial institutions and brokerages—are required to participate.
*   Participants are divided into competitive and noncompetitive bidders. The competitive bids determine the discount rate to be paid on each T-bill issue. Noncompetitive bids are guaranteed to get their securities, though they must accept the rate set by the competitive bids.
*   The lowest discount rate that meets the supply of debt being sold serves as the “winning” yield.

### What Is a Bond Auction?

A government bond auction is the process of selling short- and long-term government bonds to investors in an attempt to minimize the cost of financing national debt. Bond and bill auctions are both ways the government sells debt securities to investors to fund the national debt, but they differ in several ways:

*   Maturity: T-bills have the shortest maturities, ranging from four weeks to a year. Treasury notes (T-notes) mature in two to 10 years, and Treasury bonds (T-bonds) mature in 20 to 30 years. 
*   Auction frequency: The government auctions most short-term T-bills weekly, but longer-term T-bills are auctioned less often. 
*   Bid types: In a bond auction, there are two types of bids: competitive and noncompetitive. In a bill auction, the Treasury delivers T-bills to noncompetitive bidders on the issue day. 
*   Interest payments: T-bonds and T-notes pay interest twice a year, while all bills earn the face value at maturity. 
*   Secondary market: Buying T-bills through a broker on the secondary market can give investors more control over their bonds.

## Understanding a Bill Auction

The weekly bill auction is actually an electronic [Dutch auction](https://www.investopedia.com/terms/d/dutchauction.asp). In this sort of proceeding, investors place a bid for the amount of the offering they are willing to buy in terms of quantity and price. The best bid wins, of course, but the offering’s price is set after all the bids are taken in and sorted, as opposed to it rising sequentially as bidders consecutively counter each other.

To kick-start the process, an announcement is released several days before the auction is to occur. The announcement includes information such as the auction date, issue date, amount of securities that will be sold, bidding close times, participation eligibility, etc. Bids are accepted up to 30 days in advance.

Once it begins, the bill auction accepts [competitive bids](https://www.investopedia.com/terms/c/competitivebid.asp) to determine the [discount rate](https://www.investopedia.com/terms/d/discountrate.asp) to be paid on each issue. A group of securities dealers (banks and brokerages), known as [primary dealers](https://www.investopedia.com/terms/p/primarydealer.asp), are authorized and obligated to submit competitive bids on a [pro-rata](https://www.investopedia.com/terms/p/pro-rata.asp) share of every Treasury bill auction. The winning bid on each issue will determine the interest rate that is paid on that issue. Once an issue is purchased, the dealers are allowed to hold, sell, or trade the bills. The demand for T-bills at auction is determined by market and economic conditions.

> **Important**
>
> All bill auctions are open to the public through TreasuryDirect or the Treasury Automated Auction Processing System (TAAPS).

## Who Participates in a Bill Auction?

Participants in any Treasury auction consist of retail investors and institutional investors who submit bids categorized as either competitive or [noncompetitive tenders](https://www.investopedia.com/terms/n/noncompetitivetender.asp). Noncompetitive tenders are submitted by smaller investors. In effect, these investors are bidding a bit blind: While they are guaranteed to receive bills, they won’t know the exact final price or what discount rate they will receive until the auction closes. An investor who submits a noncompetitive bid agrees to accept the final discount rate, which is determined by the competitive side of the auction.

[Competitive tenders](https://www.investopedia.com/terms/c/competitivetender.asp) are submitted by bigger investors, such as institutional investors. Each bidder is limited to 35% of the amount of the offering per bill auction. Each bid submitted specifies the lowest rate or [discount margin](https://www.investopedia.com/terms/d/discountmargin.asp) that the investor is willing to accept for the debt securities. The bids with the lowest discount rate will be accepted first. The lowest discount rate that meets the supply of debt being sold serves as the “winning” yield or the highest accepted yield, after all noncompetitive bids have been subtracted from the total amount of securities offered.

Unlike the noncompetitive bidders, competitive bidders are not guaranteed to receive any T-bills—as approval of their bid depends on the discount yield that they offered to accept. If their offered price is too low, they may end up getting locked out of the offering. All investors, competitive and noncompetitive, who bid at or above the level of the winning yield receive securities with this discount rate.

> **Fast Fact**
>
> The noncompetitive bid closing time for bills is normally 11 a.m. Eastern time on auction day. The competitive bid closing time for bills is normally 11:30 a.m. Eastern time on auction day.

## How a Bid Auction Works

For example, suppose the Treasury seeks to raise $9 million in one-year T-bills with a 5% discount rate. (The minimum amount you can buy a bill for is $100, although the most commonly sold bills have a par between $1,000 and $10,000.) Let’s assume the competitive bids submitted are as follows:

$1 million at 4.79%

$2.5 million at 4.85%

$2 million at 4.96%

$1.5 million at 5%

$3 million at 5.07%

$1 million at 5.1%

$5 million at 5.5%

The bids with the lowest discount rates will be accepted first since the government will prefer to pay lower yields to investors. In this case, since the Treasury is looking to raise $9 million, it will accept the bids with the lowest rates up to 5.07%. At this mark of 5.07%, only $2 million of the $3 million bid will be approved. All bids below the 5.07% rate will be accepted, and bids above will be rejected. In effect, this auction is cleared at 5.07%, and all successful competitive and noncompetitive bidders receive the 5.07% discount rate.

On issue day, the Treasury delivers T-bills to noncompetitive bidders who made their submissions in a particular bill auction. In exchange, the Treasury charges the accounts of those bidders for payment of the securities. The purchase price of the T-bill is expressed as a price per hundred dollars.

## How Does a Bill Auction Work?

In the weekly bill auction, investors bid for the amount of the offering they are willing to buy in terms of quantity and price. The best bid wins, but the offering’s price is set after all the bids are taken in and sorted, vs. it rising sequentially as bidders consecutively counter each other.

## How Does a Bill Auction Begin?

An announcement is released several days before the auction is to occur. The announcement includes information such as the auction date, issue date, amount of securities that will be sold, bidding close times, participation eligibility, etc. Bids are accepted up to 30 days in advance.  

## Who Can Bid in a Bill Auction?

Participants in any Treasury auction consist of retail investors and institutional investors who submit bids categorized as either competitive or noncompetitive tenders. Noncompetitive tenders are submitted by smaller investors.

## The Bottom Line

The U.S. Treasury holds bill auctions weekly. They are public auctions of federal debt obligations—specifically, Treasury bills (T-bills), whose maturities range from one month to one year.

_Correction—April 6, 2023:_ This article has been updated to correct the example of which bids would be accepted and rejected by the Treasury.

> **Article Sources**
>
> 1.  TreasuryDirect. “[Announcements, Data & Results](https://www.treasurydirect.gov/instit/annceresult/annceresult.htm).”
>     
> 2.  Federal Reserve Bank of New York. “[Primary Dealers](https://www.newyorkfed.org/markets/primarydealers.html).”
>     
> 3.  TreasuryDirect, via Internet Archive Wayback Machine. “[Auctions](https://web.archive.org/web/20160307145501/https://www.treasurydirect.gov/indiv/products/prod_auctions_glance.htm).”
>     
> 4.  H. Kent Baker, Greg Filbeck, and Andrew C. Spieler, via Google Books. “[Debt Markets and Investments](https://books.google.com/books?id=kdShDwAAQBAJ&pg=PA642),” Page 642. Oxford University Press, 2019.
>     
> 5.  Federal Reserve Bank of New York. “[Treasury Debt Auctions and Buybacks as Fiscal Agent](https://www.newyorkfed.org/markets/treasury-debt-auctions-and-buybacks-as-fiscal-agent).”
>     
> 6.  TreasuryDirect. “[Treasury Bills](https://www.treasurydirect.gov/marketable-securities/treasury-bills/).”