4-Week Bill Auction
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Definition
Treasury bills are sold at public auctions every week. Competitive bids at these auctions determine the interest rate paid on each issue. Twenty primary dealers (as of November 30, 2007) are authorized and obligated to submit competitive tenders at Treasury auctions. Dealers can hold the bills, resell the bills to their clients or trade them with other securities firms. Since these are public auctions, the Treasury must announce the size, date and time of the auction every week. Four-week bills are announced on Monday for a Tuesday auction and are issued (settled) on Thursday of the same week. If a Monday is a banking holiday, the bills are auctioned on Wednesday.
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Why Do Investors Care?
Individual investors can participate in Treasury auctions either through a securities dealer (brokerage firm) or via the Treasury Direct program, which saves on brokerage commissions. But brokers commissions are often nominal (especially with discount brokers), and using a broker does eliminate a lot of paper work and other administrative hassles. Brokers facilitate the purchases and sales of Treasuries in the secondary market, which is handy for buying Treasuries at times other than scheduled auctions or for maturities other than those offered by standard new issues.
Interest rates on Treasury securities are determined in the market; the Federal Reserve does not set them. However, bond investors are sensitive to Federal Reserve policy and thus market rates will mirror policy expectations. Usually, bond market players are forward-looking and this means that interest rates on Treasury securities will move in the direction of Fed policy with a lead. As a result, one is more likely to see rising interest rates on Treasury yields during an expansion (and falling yields during economic slowdowns) in advance of policy changes by the Federal Reserve.
Primer on Treasuries
Treasury securities, Treasuries, U.S. government bonds, T-bonds, T-notes, T-bills, and Govies all refer to the same type of security: debt obligations of the United States. Maturity refers to the length of the loan to the government. Treasury bills have maturities from four weeks to one year, although the 52-week bill is no longer auctioned at this time. Cash management bills are auctioned occasionally, depending on the Treasury's borrowing needs. These are often for short-term needs; in the past year, the maturity on cash management bills (CMB) has been 12 to 14 days. Treasury securities have minimum denominations of $1,000.
How bills work
Since they mature so quickly, bills are simply sold at a discount to their face value at maturity. The interest is difference between the purchase price of the security and what the Treasury pays at maturity. For example, if you bought a 4-week bill for $9,900 and received$10,000 at maturity, the interest payment would be $100.
Investment Profile
Treasuries offer a measure of security unmatched by other investments - the U.S. government guarantees the initial investment (the principal) and interest payments. When Treasuries are resold in the secondary market, their prices are often significantly different than their face value since prices in the secondary market fluctuate based on the economic environment, inflation expectations, Federal Reserve policy, and simple forces of supply and demand.
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