What is an indirect bidder?

An indirect bidder is usually an overseas and international monetary authority that places a competitive or noncompetitive bid for the purchase of Treasury securities sold at auctions through a primary dealer or broker.

A primary dealer, on the other hand, is an entity such as a bank or any other financial institution that has a trading relationship with the Federal Reserve Bank of New York while other direct bidders are financial institutions that can place bids directly with the Treasury.

Treasury securities are the tradable debt security owed by the US government and issued by the US Department of the Treasury.

How are indirect bidders different from direct bidders?

A direct bidder can purchase Treasury securities for their own account instead of buying them for some other entity while indirect bidders can only place a bid for Treasury securities via another party.

Understanding indirect bidders

An example of indirect bidder would be the central banks of foreign countries and other international monetary authorities placing bids for purchasing Treasury securities indirectly via primary dealers. Domestic asset managers or investment managers could also act as indirect bidders.

To precisely understand the concept of indirect bidders and the space they occupy in the auction of Treasury securities, let us take a look at the summary statistics for Fiscal Year 2021 Q4 auctions, released by the Office of Debt Management.

During the said Treasury auction, 70.8% of the bidders were indirect bidders for the 10-year Treasury note. Indirect bidders represented 62.2% of the bidders for the 20-year Treasury note while occupying 63.7% of the total number of bidders for the 30-year notes. The share of indirect bidders for the aforementioned securities was larger than that of direct bidders, as evidenced by the table below.

It’s worth noting that the share occupied by the indirect bidders for the 10-year TIPS security stood at 70.8%, a stark contrast to the percentage of direct bidders at 15.7%. In addition, indirect bidders’ share for the 30-year TIPS security was 74.9% as compared to the direct bidders’ share of 12.4%.

Those who bid on a competitive basis must reveal the minimum yield they are willing to accept for a certain quantity of securities. On the other hand, noncompetitive bidders must specify the quantity of securities they are willing to purchase at whatever price successful competitive bidders are willing to pay. The Treasury accepts all noncompetitive bids, keeping in mind quantity limits. Competitive bids are then accepted on the basis of increasing yield until the offering amount is covered.

The Treasury releases a post-auction addendum with the information on competitive bids and awards by bidder category once the auction closes. The Treasury then releases the necessary information on the purchases made by the investor class of its securities on the seventh business day of the month after each auction.