The changing landscape of treasury auctions

Contemporary literature attributes the temporary drop in secondary prices before a Treasury auction to primary dealers’ limited risk-bearing capacity and slow-moving capital. We attribute the temporary price pressure to slow-moving capital, but not primary dealer’s limited risk-bearing capacity. We document a decline of more than 45% in the Treasury Inflation-Protected Securities (TIPS) auction amount allocated to primary dealers over the years and uncover empirical evidence inconsistent with dealers being the main contributor to the auction cycle. In contrast, our results suggest strategic trading behavior whereby some direct and indirect bidders deliberately reduce their demand in the days leading to the auction. More specifically, we find that, on average, inflows into inflation-indexed mutual funds before the auction days do not translate into increased demand for the underlying, as opposed to inflows on other days. Our results imply an issuance cost to the US Treasury of over $300 million for issuing TIPS in 2019 alone.