The Changing Landscape of Treasury Auctions

Recent literature attributes the temporary drop in secondary Treasury prices before a Treasury auction to primary dealers’ limited risk-bearing capacity. However, we document a decline of more than 45% in the Treasury Inflation-Protected Securities (TIPS) auction amount allocated to dealers over the years, without any apparent decline in temporary price pressure. We show that dealers are mostly active in the inflation-derivatives market rather than the TIPS market. We attribute the temporary price pressure to slow-moving capital, and we find evidence of strategic trading where some direct and indirect bidders deliberately reduce their demand in the days leading to the auction. More specifically, we find that, on average, an inflow in an inflation-indexed mutual fund before the auction days does not translate into increased demand for the underlying, as opposed to inflows other than surrounding the auction days. Our results imply a large issuance cost for TIPS to the US Treasury.