<p>For Option 1 (lowering yield) the procedure is not described correctly in the OP.  The Fed does not place bids in the market.  In fact, they ask primary dealers for their offer price for a range of different securities, entered on the Fed website at around 10am on specific dates. They then use an algorithm to decide which prices to accept, publishing the results promptly.  The details can be found on Fed <a href="https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/treasury-securities/treasury-securities-operational-details" rel="nofollow noreferrer">https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/treasury-securities/treasury-securities-operational-details</a></p>
<p>Lowering yields Option 2 is incorrectly described.  The Fed does not bid competitively at Treasury auctions. Instead, they purchase securities at the auction yield determined by the private market participants.  One could still argue that their activity drives yields down, because it reduces the amount of securities that are being sold to the public.  Note also that the Fed is not allowed to increase their portfolio size using Treasury auctions.  They are only allowed to roll over maturing securities.  Details:
<a href="https://www.newyorkfed.org/markets/treasury-rollover-faq" rel="nofollow noreferrer">https://www.newyorkfed.org/markets/treasury-rollover-faq</a></p>
<p>For raising yields, Option 1 is described almost correctly.  The Fed sets a monthly principal amount of Treasury face value that it allows to mature without reinvestment.  Let’s say it is 80bn for a given month.  But if 100bn of securities mature that month, 20bn will be reinvested, giving the Fed some control over maturity buckets.</p>
<p>Raising yields Option 2 has never been implemented.  Theoretically it could be, but so far the Fed has chosen the more passive route of allowing securities to mature.</p>

CC BY-SA 4.0
2022-08-28T10:14:53.777Z
On the last paragraph: Has the Fed not agreed on a minimum monthly run-off and decided that, if the maturing bonds fall below the minimum, to top it off by actively selling?
BrsG
CC BY-SA 4.0
2022-08-28T15:42:14.213Z
I didn’t see that announcement.
dm63
CC BY-SA 4.0
2022-08-28T21:01:43.883Z
@BrsG For Treasuries, if there are not enough coupon maturities to hit the 60B cap they will allow bills to run off. For MBS, if there are not enough repayments to hit the 35B monthly cap they will let the balance roll off from treasuries.  So far, no outright sales have been planned.
Solaxun
CC BY-SA 4.0
2022-08-28T21:31:01.410Z
@dm63 For option 1 lowering, if the dealers are just showing asks to the fed via a multiple price auction, how can the fed ensure the asks prices are high enough to achieve their target?  For option 2 lowering, I know that the fed places non-competitive bids for rolls, but for new purchases, I wasn't sure if the primary dealers would place bids at targeted prices to hit the feds desired yield, since the fed could then purchase from the dealers.  Basically, the dealer is just an intermediary to keep the transactions at arm's length.  Lastly, Option 2 raising - a small amount of outright sales..
Solaxun
CC BY-SA 4.0
2022-08-28T21:32:05.870Z
@dm63 .. are shown for both treasuries: https://www.newyorkfed.org/markets/desk-operations/treasury-securities and agency MBS https://www.newyorkfed.org/markets/desk-operations/ambs
Solaxun
CC BY-SA 4.0
2022-08-29T03:07:25.063Z
@solaxun option 2 raising: I believe those are ‘small value operations’ to test the plumbing in case they need to implement more broadly. 
Option 1 lowering : at the reverse auction, the Fed ends up buying securities pretty much at the market price - it is the announcement of the intention to buy, rather than the actual auction, that causes the market to move.  Also to be clear, the Fed does not have a target yield for the yields of particular Treasuries, as they do for Fed Funds.  They just announce how many they will buy and the market does what it does.
dm63
CC BY-SA 4.0
2022-08-29T03:11:35.900Z
@solaxun option 2 lowering: no the Fed does not act through primary dealers at Treasury auctions.
dm63
CC BY-SA 4.0
2022-08-29T17:24:18.260Z
@dm63 Thanks - I can understand not having a specific target, but surely they would not make purchases if they expected the yields to remain flat? If they make an announcement of intention to purchase, and demand is abysmally low for whatever reason, yields could (in theory) actually increase despite the addition of the fed as a buyer, right?  For option 2 lowering - is there any action taken at auction by dealers, fed, or any other fed proxy which has the intention of reducing the yield explicitly (not talking about non-competitive bids, although that may have an impact by reducing supply)?
Solaxun
CC BY-SA 4.0
2022-09-02T18:44:35.847Z
@dm63 marking this accepted as it is the most complete answer.  I do still wonder the exact mechanics of how a reverse auction, where the fed solicits offers from the primary dealers, can ensure yields decrease.  What if the dealers put in asks at market, or even slightly below (in price)?  Is it strictly a supply reduction thing, e.g. they don't care ab out the immediate impact but assume in the long run that taking supply out will increase prices?
Solaxun
CC BY-SA 4.0
2022-09-03T11:55:56.820Z
Yes, I agree with that
dm63
CC BY-SA 4.0
2022-08-28T07:32:26.957Z
2022-08-28T08:11:10.250Z
2022-08-28T08:11:10.250Z
dm63
<h3>Lower yields through open market operations</h3>
<p>When the fed wants to put downward pressure on treasury rates, one tool it can use is open market purchases of the tenor it wants to push yields down on.  Mechanically, I assume this can be achieved 2 ways:</p>
<ul>
<li>open market purchases in the secondary market (previously auctioned securities)</li>
<li>purchases at auction with primary dealers acting as an intermediary.</li>
</ul>
<p><strong>Option 1</strong>  it's clear how the yields would be affected.  The fed just places bids at a price sufficient to hit the yield it is targeting, and since that is likely above the prevailing market price, it will be accepted.  Similar bonds will then price up to reflect this price action.  New auctions will not price higher (yield less than) these off-the-run issues in a meaningful way, otherwise market participants would just buy the off-the-runs.</p>
<p><strong>Option 2</strong> is less clear to me.  Treasury auctions are &quot;single-price&quot;, meaning that everybody submits their minimum accepted yield, and the highest accepted yield (the &quot;stop&quot;) is what all participants receive<sup>1</sup>.  Here, if demand is strong and the primary dealer doesn't take down the entire auction, what would happen when other participants bid higher than the dealers?  Could that neutralize their efforts to suppress yields?  For example, let's say the auction is for $500B of 10 year notes, and the following bids are received:</p>
<p><sup>1</sup> <a href="https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci11-2.pdf" rel="nofollow noreferrer">The Treasury Auction Process</a></p>
<div class="s-table-container">
<table class="s-table">
<thead>
<tr>
<th>bidder</th>
<th>bid yield</th>
<th>bid size</th>
<th>accepted size</th>
</tr>
</thead>
<tbody>
<tr>
<td>primary dealer*</td>
<td>3.00%</td>
<td>200B</td>
<td>200B</td>
</tr>
<tr>
<td>Hedge Fund 1</td>
<td>3.20%</td>
<td>100B</td>
<td>100B</td>
</tr>
<tr>
<td>Hedge Fund 2</td>
<td>3.28%</td>
<td>150B</td>
<td>150B</td>
</tr>
<tr>
<td>Hedge Fund 3**</td>
<td>3.33%</td>
<td>75B</td>
<td>50B</td>
</tr>
<tr>
<td>Money Market Fund</td>
<td>3.45%</td>
<td>100B</td>
<td>0B</td>
</tr>
</tbody>
</table>
</div>
<p>*Fed, using primary dealer as intermediary<br>**Hedge Fund 3 is the &quot;stop yield&quot; bid</p>
<hr>
<p>The fed (through primary dealer) wants yields at 3.00%, but they only bid 200 of the full 500 issuance.  Hedge Fund 3 has the highest bid (the &quot;stop&quot;) so the entire auction prices at 3.33%. <strong>How is this issue avoided in practice?  Does the dealer just take the whole bid down?  Does the treasury simply refuse bids below a certain yield (which would mean they are working with the fed)?  Are purchases at auction not really a tool used to push yields lower (only secondary market purchases)?</strong></p>
<h3>Increasing yields through open market operations</h3>
<p>Going in the other direction, it would appear the fed has less control. There is nothing to be done at auction other than not participate, so the primary tool to raise yields would reducing their SOMA portfolio, which can be accomplished two ways:</p>
<ul>
<li>Not reinvesting maturities (what is currently happening)</li>
<li>Selling SOMA holdings outright in the secondary market</li>
</ul>
<p><strong>Option 1</strong> not reinvesting maturities removes reserves from the private sector as new issuances by the treasury must be met by non-fed institutions.  If cash is limited enough, they will probably demand a higher yield for treasuries. This seems more of a blunt tool, as it would be hard to target a tenor (depends on what the treasury issues) and similarly difficult to know how much reserve withdraw equates to how much rate increase, and where on the curve that increase occurs.  If demand for treasuries is particularly strong, I would assume it may be possible that, even flooding the market with new issuances, yields remain stubbornly low.</p>
<p><strong>Option 2</strong> - would provide more precise control, as the fed could place an ask price at the yield it wants to target (and for the tenor), and if that yield is above market participants will take it.  Even if there is strong demand there is no chance of yields remaining below what the fed desires (like in the auction example) because the fed just keeps selling at prices below market until it's desired yield is achieved.</p>
<hr>
<p>So my general questions - are the assumptions I've made above correct for the 4 options (2 lowering yield, 2 increasing)?  For auction purchases, is the bidding conundrum I outlined an issue?</p>

CC BY-SA 4.0
2022-08-24T18:39:57.163Z
I think you have confused the relationship between yield and price in the the second option for lowering yields (bidding). The lower the price, the higher the yield (and the other way round). So the primary dealer would actually win, as he offers the highest price. In that sense there is no bidding conundrum.
BrsG
CC BY-SA 4.0
2022-08-24T19:49:51.760Z
@BrsG How so?  Everything I mention there is in reference to yields, not prices.  I understand the relationship between prices and yield.
Solaxun
CC BY-SA 4.0
2022-08-24T19:54:57.090Z
The treasury prefers to sell at the highest price, so the bid with the highest price wins. So, in your example, where bidders use yields, the *lowest* yield wins, not the highest.
BrsG
CC BY-SA 4.0
2022-08-24T20:02:38.563Z
@BrsG No, that's not correct. "The Treasury conducts note auctions in a 'single-price' format. After the close of bidding, it subtracts the noncompetitive bids from the total quantity of securities offered and then accepts competitive bids in order of increasing yield, until it has exhausted the offering. The highest accepted yield is called the 'stop.' Bids specifying yields below the stop are filled in full, bids above the stop are rejected, and bids at the stop are filled pro rata. All auction awards are made at a single price, computed from the yield at which the auction stopped."
Solaxun
CC BY-SA 4.0
2022-08-25T09:34:39.030Z
Indeed: "[it] accepts competitive bids *in order of increasing yield*". That means, it accepts offers with the lowest yield first. In your example, it's the other way round!
BrsG
CC BY-SA 4.0
2022-08-25T10:54:30.243Z
Counter question. As a wannabe hedge fund owner I love returns. What would prevent me, based on your understanding of how the auction works, from entering a bid with 300,000.00%? Surely I would win, unless someone else would bid even higher. Wouldn't it be a really good, almost risk free return (although at these rates, it will become somewhat risky too)?
Alex
CC BY-SA 4.0
2022-08-25T17:34:34.290Z
@BrsG Yes, it accepts them in order of increasing yield, but *all accepted bids get the highest accepted yield*.  Is it the table order in my example that is confusing?  I sorted by descending yield but mentioned in my description that the stop was the hedge fund.  I thought it was pretty clear.
Solaxun
CC BY-SA 4.0
2022-08-25T17:38:09.900Z
@Alex That is a good example of taking the question I have to the extreme.  Unless the treasury sets some maximum yield (independent of the auction results), then somebody could in theory do as you said -  place a very out of market bid and hope there is low demand.  Please read the linked paper on the auction process if there are doubts as to "all participants receiving the maximum accepted yield"
Solaxun
CC BY-SA 4.0
2022-08-25T22:49:50.813Z
You forget the bids above the ones in your example. The yield would be (a lot) higher would the fed not bid. Likewise, in secondary markets, the fed also does not simply set a price. Similar to other markets, just because you place an order to buy at a price up to whatever, you almost never pay that exact price. Many institutions need treasuries (banks as high quality liquid assets for LCR calculations for example).  The incentives to buy are the reason such low yields or even negative in some countries were even possible (and why extremely high yields will never win).
Alex
CC BY-SA 4.0
2022-08-26T04:07:56.300Z
@Alex bids at yields higher than Hedge Fund 1 are irrelevant in this example because by that point the full issue has been allocated.  Hedge Fund's bid 1 is the "stop yield".  In a secondary market, if you bid above the best bid, you get filled.  It may be slightly different in the treasury market since it's OTC, but the principle is the same.
Solaxun
CC BY-SA 4.0
2022-08-26T08:43:27.030Z
Yes, but what if you take the central bank away? Will it still be 3.28%? I really don't get the problem? Also, there is no explicit target for treasury rates. Even the fed funds market is in a range and not a set rate.
Alex
CC BY-SA 4.0
2022-08-26T19:54:34.533Z
@Alex it could be higher without the central bank, it could be lower. It depends on the overall demand. My point was that in the unusual event of very low demand, if the CB doesn’t bid the entire issuance wouldn’t there be a risk of much higher bid yields setting the stop? How does the CB manages that risk?
Solaxun
<monetary-policy><federal-reserve><auctions><treasuries>
How the fed influences treasury rates through open market operations
Solaxun
# How the fed influences treasury rates through open market operations

(Asked by: username_0 on 2022-08-24)

### Lower yields through open market operations

When the fed wants to put downward pressure on treasury rates, one tool it can use is open market purchases of the tenor it wants to push yields down on. Mechanically, I assume this can be achieved 2 ways:

* open market purchases in the secondary market (previously auctioned securities)
* purchases at auction with primary dealers acting as an intermediary.

**Option 1** it's clear how the yields would be affected. The fed just places bids at a price sufficient to hit the yield it is targeting, and since that is likely above the prevailing market price, it will be accepted. Similar bonds will then price up to reflect this price action. New auctions will not price higher (yield less than) these off-the-run issues in a meaningful way, otherwise market participants would just buy the off-the-runs.

**Option 2** is less clear to me. Treasury auctions are "single-price", meaning that everybody submits their minimum accepted yield, and the highest accepted yield (the "stop") is what all participants receive1. Here, if demand is strong and the primary dealer doesn't take down the entire auction, what would happen when other participants bid higher than the dealers? Could that neutralize their efforts to suppress yields? For example, let's say the auction is for $500B of 10 year notes, and the following bids are received:

1 [The Treasury Auction Process](https://www.newyorkfed.org/medialibrary/media/research/current_issues/ci11-2.pdf)

| bidder | bid yield | bid size | accepted size |
| --- | --- | --- | --- |
| primary dealer\* | 3.00% | 200B | 200B |
| Hedge Fund 1 | 3.20% | 100B | 100B |
| Hedge Fund 2 | 3.28% | 150B | 150B |
| Hedge Fund 3\*\* | 3.33% | 75B | 50B |
| Money Market Fund | 3.45% | 100B | 0B |

\*Fed, using primary dealer as intermediary  
\*\*Hedge Fund 3 is the "stop yield" bid

---

The fed (through primary dealer) wants yields at 3.00%, but they only bid 200 of the full 500 issuance. Hedge Fund 3 has the highest bid (the "stop") so the entire auction prices at 3.33%. **How is this issue avoided in practice? Does the dealer just take the whole bid down? Does the treasury simply refuse bids below a certain yield (which would mean they are working with the fed)? Are purchases at auction not really a tool used to push yields lower (only secondary market purchases)?**

### Increasing yields through open market operations

Going in the other direction, it would appear the fed has less control. There is nothing to be done at auction other than not participate, so the primary tool to raise yields would reducing their SOMA portfolio, which can be accomplished two ways:

* Not reinvesting maturities (what is currently happening)
* Selling SOMA holdings outright in the secondary market

**Option 1** not reinvesting maturities removes reserves from the private sector as new issuances by the treasury must be met by non-fed institutions. If cash is limited enough, they will probably demand a higher yield for treasuries. This seems more of a blunt tool, as it would be hard to target a tenor (depends on what the treasury issues) and similarly difficult to know how much reserve withdraw equates to how much rate increase, and where on the curve that increase occurs. If demand for treasuries is particularly strong, I would assume it may be possible that, even flooding the market with new issuances, yields remain stubbornly low.

**Option 2** - would provide more precise control, as the fed could place an ask price at the yield it wants to target (and for the tenor), and if that yield is above market participants will take it. Even if there is strong demand there is no chance of yields remaining below what the fed desires (like in the auction example) because the fed just keeps selling at prices below market until it's desired yield is achieved.

---

So my general questions - are the assumptions I've made above correct for the 4 options (2 lowering yield, 2 increasing)? For auction purchases, is the bidding conundrum I outlined an issue?

**Tags:** monetary-policy, federal-reserve, auctions, treasuries

> **Comments:**
> **username_1**: I think you have confused the relationship between yield and price in the the second option for lowering yields (bidding). The lower the price, the higher the yield (and the other way round). So the primary dealer would actually win, as he offers the highest price. In that sense there is no bidding conundrum.  
> **username_0**: @username_1 How so?  Everything I mention there is in reference to yields, not prices.  I understand the relationship between prices and yield.  
> **username_1**: The treasury prefers to sell at the highest price, so the bid with the highest price wins. So, in your example, where bidders use yields, the *lowest* yield wins, not the highest.  
> **username_0**: @username_1 No, that's not correct. "The Treasury conducts note auctions in a 'single-price' format. After the close of bidding, it subtracts the noncompetitive bids from the total quantity of securities offered and then accepts competitive bids in order of increasing yield, until it has exhausted the offering. The highest accepted yield is called the 'stop.' Bids specifying yields below the stop are filled in full, bids above the stop are rejected, and bids at the stop are filled pro rata. All auction awards are made at a single price, computed from the yield at which the auction stopped."  
> **username_1**: Indeed: "[it] accepts competitive bids *in order of increasing yield*". That means, it accepts offers with the lowest yield first. In your example, it's the other way round!  
> **username_2**: Counter question. As a wannabe hedge fund owner I love returns. What would prevent me, based on your understanding of how the auction works, from entering a bid with 300,000.00%? Surely I would win, unless someone else would bid even higher. Wouldn't it be a really good, almost risk free return (although at these rates, it will become somewhat risky too)?  
> **username_0**: @username_1 Yes, it accepts them in order of increasing yield, but *all accepted bids get the highest accepted yield*.  Is it the table order in my example that is confusing?  I sorted by descending yield but mentioned in my description that the stop was the hedge fund.  I thought it was pretty clear.  
> **username_0**: @username_2 That is a good example of taking the question I have to the extreme.  Unless the treasury sets some maximum yield (independent of the auction results), then somebody could in theory do as you said -  place a very out of market bid and hope there is low demand.  Please read the linked paper on the auction process if there are doubts as to "all participants receiving the maximum accepted yield"  
> **username_2**: You forget the bids above the ones in your example. The yield would be (a lot) higher would the fed not bid. Likewise, in secondary markets, the fed also does not simply set a price. Similar to other markets, just because you place an order to buy at a price up to whatever, you almost never pay that exact price. Many institutions need treasuries (banks as high quality liquid assets for LCR calculations for example).  The incentives to buy are the reason such low yields or even negative in some countries were even possible (and why extremely high yields will never win).  
> **username_0**: @username_2 bids at yields higher than Hedge Fund 1 are irrelevant in this example because by that point the full issue has been allocated.  Hedge Fund's bid 1 is the "stop yield".  In a secondary market, if you bid above the best bid, you get filled.  It may be slightly different in the treasury market since it's OTC, but the principle is the same.  
> **username_2**: Yes, but what if you take the central bank away? Will it still be 3.28%? I really don't get the problem? Also, there is no explicit target for treasury rates. Even the fed funds market is in a range and not a set rate.  
> **username_0**: @username_2 it could be higher without the central bank, it could be lower. It depends on the overall demand. My point was that in the unusual event of very low demand, if the CB doesn’t bid the entire issuance wouldn’t there be a risk of much higher bid yields setting the stop? How does the CB manages that risk?  

---

## 1 answers

### Answer by username_3 on 2022-08-28. Score: 4 | Accepted answer

For Option 1 (lowering yield) the procedure is not described correctly in the OP. The Fed does not place bids in the market. In fact, they ask primary dealers for their offer price for a range of different securities, entered on the Fed website at around 10am on specific dates. They then use an algorithm to decide which prices to accept, publishing the results promptly. The details can be found on Fed <https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/treasury-securities/treasury-securities-operational-details>

Lowering yields Option 2 is incorrectly described. The Fed does not bid competitively at Treasury auctions. Instead, they purchase securities at the auction yield determined by the private market participants. One could still argue that their activity drives yields down, because it reduces the amount of securities that are being sold to the public. Note also that the Fed is not allowed to increase their portfolio size using Treasury auctions. They are only allowed to roll over maturing securities. Details:
<https://www.newyorkfed.org/markets/treasury-rollover-faq>

For raising yields, Option 1 is described almost correctly. The Fed sets a monthly principal amount of Treasury face value that it allows to mature without reinvestment. Let’s say it is 80bn for a given month. But if 100bn of securities mature that month, 20bn will be reinvested, giving the Fed some control over maturity buckets.

Raising yields Option 2 has never been implemented. Theoretically it could be, but so far the Fed has chosen the more passive route of allowing securities to mature.

> **Comments:**
> **username_1**: On the last paragraph: Has the Fed not agreed on a minimum monthly run-off and decided that, if the maturing bonds fall below the minimum, to top it off by actively selling?  
> **username_3**: I didn’t see that announcement.  
> **username_0**: @username_1 For Treasuries, if there are not enough coupon maturities to hit the 60B cap they will allow bills to run off. For MBS, if there are not enough repayments to hit the 35B monthly cap they will let the balance roll off from treasuries.  So far, no outright sales have been planned.  
> **username_0**: @username_3 For option 1 lowering, if the dealers are just showing asks to the fed via a multiple price auction, how can the fed ensure the asks prices are high enough to achieve their target?  For option 2 lowering, I know that the fed places non-competitive bids for rolls, but for new purchases, I wasn't sure if the primary dealers would place bids at targeted prices to hit the feds desired yield, since the fed could then purchase from the dealers.  Basically, the dealer is just an intermediary to keep the transactions at arm's length.  Lastly, Option 2 raising - a small amount of outright sales..  
> **username_0**: @username_3 .. are shown for both treasuries: https://www.newyorkfed.org/markets/desk-operations/treasury-securities and agency MBS https://www.newyorkfed.org/markets/desk-operations/ambs  
> **username_3**: @username_0 option 2 raising: I believe those are ‘small value operations’ to test the plumbing in case they need to implement more broadly.  Option 1 lowering : at the reverse auction, the Fed ends up buying securities pretty much at the market price - it is the announcement of the intention to buy, rather than the actual auction, that causes the market to move.  Also to be clear, the Fed does not have a target yield for the yields of particular Treasuries, as they do for Fed Funds.  They just announce how many they will buy and the market does what it does.  
> **username_3**: @username_0 option 2 lowering: no the Fed does not act through primary dealers at Treasury auctions.  
> **username_0**: @username_3 Thanks - I can understand not having a specific target, but surely they would not make purchases if they expected the yields to remain flat? If they make an announcement of intention to purchase, and demand is abysmally low for whatever reason, yields could (in theory) actually increase despite the addition of the fed as a buyer, right?  For option 2 lowering - is there any action taken at auction by dealers, fed, or any other fed proxy which has the intention of reducing the yield explicitly (not talking about non-competitive bids, although that may have an impact by reducing supply)?  
> **username_0**: @username_3 marking this accepted as it is the most complete answer.  I do still wonder the exact mechanics of how a reverse auction, where the fed solicits offers from the primary dealers, can ensure yields decrease.  What if the dealers put in asks at market, or even slightly below (in price)?  Is it strictly a supply reduction thing, e.g. they don't care ab out the immediate impact but assume in the long run that taking supply out will increase prices?  
> **username_3**: Yes, I agree with that  

---

