What Is an Indirect Bidder?

An indirect bidder, commonly a foreign entity, purchases Treasury securities at auction through an intermediary, such as a primary dealer or broker.

Key Takeaways

  • An indirect bidder, commonly a foreign entity, purchases Treasury securities at auction through an intermediary, such as a primary dealer or broker.
  • The Treasury Department permits indirect bidders to place bids on a competitive and a noncompetitive basis.
  • Treasury note purchases by indirect bidders are a proxy for investments made by foreign investors, which helps the Treasury Department to gauge foreigner demand for U.S. Treasury securities.

Understanding Indirect Bidder

Essentially, indirect bidders are customers placing competitive bids at U.S. Treasury auctions through primary dealers and can run the gamut from foreign central banks, to domestic money managers.

The Treasury Department permits indirect bidders to place bids on a competitive and a noncompetitive basis. A noncompetitive bid does not require the bidder to indicate the desired yield or return. The Treasury accepts these bids first and then fills competitive bids, starting with the submission requesting the lowest yield. In a competitive bid, the bidder must specify their desired return, with the dollar amount of securities.

At auction's end, the Treasury Department announces the dollar amount of securities bought by primary dealers, direct bidders, and by indirect bidders. In the 2000s, the Department made an effort to be more forthcoming and honest about where all of the auction bids were coming from (i.e., who was buying U.S. debt). This clarification also helps reveal how the type of proposals made affects variations in purchases, especially foreign investments.

Treasury note purchases by indirect bidders are a proxy for investments made by foreign investors. They help the Treasury Department gauge the willingness of foreigners to continue purchasing Treasury securities. Foreign entities make up a significant portion of the ownership of outstanding Treasury securities. The willingness of these organizations to continue buying securities has a major impact on the ability of the Treasury to raise funds.

Foreign Investor as Indirect Bidder

Foreigners purchase Treasury securities via indirect bidders because it leads to a situation where many investors are bidding together. Indirect bids are good for foreign purchases of Treasury notes (T-notes). T-notes are securities with maturities of more than a year, but not more than ten years. On the other hand, indirect bids are not helpful for Treasury bills (T-bills). T-bills have original maturities of one year or less. 

For example, in 2016, indirect bids from foreign governments went up from 56.6% in January to 65.5% in March in the Treasury inflation-protected securities (TIPS) auction. Indirect bidders expected inflation to rise and hoped that buying in the TIPS would help protect them in a higher inflation market.

Foreign investors and indirect bidders have been investing in U.S. debt for many years. According to a 2007 analysis by the Federal Reserve Bank of New York, indirect bidders account for approximately 21% of purchased shares for Treasure securities and just over 17% for Treasury bills.