Indirect Bidder

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.

The U.S. government regularly issues debt securities or bonds to finance the federal government's borrowings. The U.S. Treasury Department auctions various types of securities on a regular basis. These securities are purchased by foreign governments, central banks, investment funds, and individual investors. During each auction, the Treasury department accept bids through its automated system called the Treasury Automated Auction Processing System (TAAPS).

A direct bidder is an individual or organization that purchases Treasury securities during an auction for themselves or their house account. Conversely, an indirect bidder is when an individual or customer places a bid through another party. For example, foreign and international monetary authorities, such a central banks, often place bids for Treasury securities indirectly through another entity.

Understanding Indirect Bidder

Indirect bidders are customers placing competitive bids at U.S. Treasury auctions through primary dealers and can include foreign central banks and domestic money managers.

The Treasury Department permits indirect bidders to place bids on a competitive and noncompetitive basis. A noncompetitive bid does not require the bidder to indicate the desired yield or rate of 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 the auction's end, the Treasury Department announces the dollar amount of securities bought by primary dealers, direct bidders, and 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.

There are various types of securities that are sold at a Treasury auction. Treasury notes (T-notes) are securities with maturities of more than a year but not more than ten years. On the other hand, Treasury bills (T-bills) have original maturities of one year or less. Treasury inflation-protected security (TIPS) are bonds that adjust their value based on an inflation index, which helps investors keep up with rising prices in the economy. As inflation increases, the interest payments for a TIPS security increases, and when inflation decreases, the interest payment for a TIPS security decreases.

Indirect Bidder and Foreign Investors

Treasury security 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 U.S. debt. 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.

Example of Indirect Bidder

Below is a table from the U.S. Treasury showing the bidding interest for the various auctions in Q2 2020. It outlines the percentage of bidders who were primary dealers, direct bidders, and indirect bidders.

• During the Treasury auction, 59.3% of the bidders were indirect bidders for the 10-year Treasury note.
• For the 30-year bond, 64.5% were indirect bidders.
• Interestingly, indirect bidders represented 68.6% of the bidders for the 10-year TIPS security.
• For the 30-year TIPS bond, 73.7% were indirect bidders.

Investors often attempt to interpret sentiment in the bond market by analyzing Treasury auction results. For example, the interest in TIPS by indirect bidders could mean that foreign investors and foreign central banks expect inflation to increase in the coming years. Of course, the results from one auction doesn't determine a trend. Instead, investors should compare the bidding results from multiple Treasury auctions to help determine whether the bidding interest for specific Treasuries is increasing or decreasing.