<p>The explanation is given in <a href="https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci11-2.pdf" rel="nofollow noreferrer">NY FED - The Treasury Auction Process: Objectives, Structure, and Recent Adaptations</a>.</p>
<blockquote>
<p>The Treasury first adopted the multiple-price format when it initiated
bill auctions in 1929 and it continued to use that format when it
introduced auctions of coupon-bearing securities in the early 1970s.
However, when the auction process came under scrutiny in 1991, public
officials became interested in alternative formats that might appeal
to more investors and that might lead to lower financing costs.
Several academics had suggested earlier that single-price auctions
might reduce financing costs (see Carson [1959], Friedman [1960,
1963], and Smith [1966]). In a single-price auction, a participant can
bid its actual reservation yield for a new security, that is, the
minimum yield at which it is willing to buy the security. The bidder
certainly has no reason to bid a lower yield, but if the auction stops
at a higher yield it will get the full benefit of buying at that
higher yield. In contrast, the multiple-price format encourages a
participant to bid higher than its reservation yield in hopes of
getting the security on more favorable terms.</p>
</blockquote>
<p>Box 2 explains the results from the test auctions that the treasury conducted.</p>
<blockquote>
<p>The Treasury produced two empirical studies of the results of its
experiment with a single-price auction format: Malvey, Archibald, and
Flynn (1995) and Malvey and Archibald (1998). The studies
calculated—for both single-price and multiple-price auctions—the
difference between the auction yield of a security and the yield at
which the same security was trading in the when-issued market at the
time of the auction. A positive difference indicated that the
securities had been auctioned at a yield higher than the one at which
they were trading in the when-issued market. For securities auctioned
in a multiple-price format, the average difference was statistically
significantly greater than zero. For securities auctioned in a
single-price format, however, the studies were unable to reject the
hypothesis that the average difference was zero. These results suggest
that moving to a single-price format would lead to lower financing
costs.</p>
</blockquote>
<p>If you continue reading you will see that the results are not unambiguous. Nonetheless, the underlying idea is that this design should lead to lower costs and there is some evidence that it indeed does.</p>

CC BY-SA 4.0
2023-03-19T23:50:29.290Z
2023-03-19T23:50:29.290Z
AKdemy
<p>This question pertains to the US Treasury auction process. {1} states:</p>
<blockquote>
<p>Treasury auctions are designed to minimize the cost of financing the national debt by promoting broad, competitive bidding and liquid secondary market trading.</p>
</blockquote>
<p>However, from my understanding, <a href="https://money.stackexchange.com/a/155730/5656">all competitive and noncompetitive bids that are filled receive the same rate, which is the rate of the lowest filled bid.</a>. This seems to contradict {1}, seems it does not minimize the cost of financing the national debt.</p>
<p>Why do all competitive and noncompetitive bids that are filled receive the same rate, which is the rate of the highest filled bid, during the US Treasury auction process?</p>
<hr />
<p>References:</p>
<ul>
<li>{1} Garbade, Kenneth, and Jeffrey Ingber. &quot;<a href="https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci11-2.pdf" rel="nofollow noreferrer">The treasury auction process: Objectives, structure, and recent adaptations.</a>&quot; Structure, and Recent Adaptations (2005). (<a href="https://archive.org/details/us-treasury-auction-process" rel="nofollow noreferrer">mirror</a>)</li>
</ul>

CC BY-SA 4.0
2023-03-19T23:36:50.713Z
I assume you haven't read the paper in your linked question? Otherwise, what's unclear about "*In a single-price auction, a participant can bid its actual reservation yield for
a new security, that is, the minimum yield at which it is willing to buy the security. The bidder certainly has no reason to bid a lower yield, but if the auction stops at a higher yield it will get the full benefit of buying at that higher yield. In contrast, the multiple-price format encourages a participant to bid higher than its reservation yield in hopes of getting the security on more favorable terms."
AKdemy
CC BY-SA 4.0
2023-03-19T23:43:49.933Z
@AKdemy thanks, you're welcome to post it as an answer.
Franck Dernoncourt
<auctions><united-states><treasuries>
Why do all filled bids receive the same rate, which is the rate of the lowest filled bid, during the US Treasury auction process?
Franck Dernoncourt
# Why do all filled bids receive the same rate, which is the rate of the lowest filled bid, during the US Treasury auction process?

(Asked by: username_0 on 2023-03-19)

This question pertains to the US Treasury auction process. {1} states:

> Treasury auctions are designed to minimize the cost of financing the national debt by promoting broad, competitive bidding and liquid secondary market trading.

However, from my understanding, [all competitive and noncompetitive bids that are filled receive the same rate, which is the rate of the lowest filled bid.](https://money.stackexchange.com/a/155730/5656). This seems to contradict {1}, seems it does not minimize the cost of financing the national debt.

Why do all competitive and noncompetitive bids that are filled receive the same rate, which is the rate of the highest filled bid, during the US Treasury auction process?

---

References:

* {1} Garbade, Kenneth, and Jeffrey Ingber. "[The treasury auction process: Objectives, structure, and recent adaptations.](https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci11-2.pdf)" Structure, and Recent Adaptations (2005). ([mirror](https://archive.org/details/us-treasury-auction-process))

**Tags:** auctions, united-states, treasuries

> **Comments:**
> **username_1**: I assume you haven't read the paper in your linked question? Otherwise, what's unclear about "*In a single-price auction, a participant can bid its actual reservation yield for a new security, that is, the minimum yield at which it is willing to buy the security. The bidder certainly has no reason to bid a lower yield, but if the auction stops at a higher yield it will get the full benefit of buying at that higher yield. In contrast, the multiple-price format encourages a participant to bid higher than its reservation yield in hopes of getting the security on more favorable terms."  
> **username_0**: @username_1 thanks, you're welcome to post it as an answer.  

---

## 1 answers

### Answer by username_1 on 2023-03-19. Score: 2 | Accepted answer

The explanation is given in [NY FED - The Treasury Auction Process: Objectives, Structure, and Recent Adaptations](https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci11-2.pdf).

> The Treasury first adopted the multiple-price format when it initiated
> bill auctions in 1929 and it continued to use that format when it
> introduced auctions of coupon-bearing securities in the early 1970s.
> However, when the auction process came under scrutiny in 1991, public
> officials became interested in alternative formats that might appeal
> to more investors and that might lead to lower financing costs.
> Several academics had suggested earlier that single-price auctions
> might reduce financing costs (see Carson [1959], Friedman [1960,
> 1963], and Smith [1966]). In a single-price auction, a participant can
> bid its actual reservation yield for a new security, that is, the
> minimum yield at which it is willing to buy the security. The bidder
> certainly has no reason to bid a lower yield, but if the auction stops
> at a higher yield it will get the full benefit of buying at that
> higher yield. In contrast, the multiple-price format encourages a
> participant to bid higher than its reservation yield in hopes of
> getting the security on more favorable terms.

Box 2 explains the results from the test auctions that the treasury conducted.

> The Treasury produced two empirical studies of the results of its
> experiment with a single-price auction format: Malvey, Archibald, and
> Flynn (1995) and Malvey and Archibald (1998). The studies
> calculated—for both single-price and multiple-price auctions—the
> difference between the auction yield of a security and the yield at
> which the same security was trading in the when-issued market at the
> time of the auction. A positive difference indicated that the
> securities had been auctioned at a yield higher than the one at which
> they were trading in the when-issued market. For securities auctioned
> in a multiple-price format, the average difference was statistically
> significantly greater than zero. For securities auctioned in a
> single-price format, however, the studies were unable to reject the
> hypothesis that the average difference was zero. These results suggest
> that moving to a single-price format would lead to lower financing
> costs.

If you continue reading you will see that the results are not unambiguous. Nonetheless, the underlying idea is that this design should lead to lower costs and there is some evidence that it indeed does.


---

