What is an Indirect Bidder

An indirect bidder is an entity who purchases Treasury securities at auction through an intermediary, such as a dealer or bank. Indirect bidders include financial institutions, including foreign central banks. The indirect bidder may also be a domestic money manager making bids through primary dealers.

BREAKING DOWN Indirect Bidder

The Treasury Department permits indirect bidding 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 bid first and then fills competitive bids starting with the submission requesting the lowest yield. In a competitive bid, the direct 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 from where all of the auction bids were coming. In other words, 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 foreign banks to continue purchasing Treasury securities. Foreign entities make up a significant portion of the owners 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 Investors Use of Indirect Bidding

The foreign purchase of Treasury securities uses indirect bidders because it leads to a situation where many investors are bidding indirectly 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 percent in January to 65.5 percent 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 twenty-one percent of purchase shares for Treasure securities and just over seventeen percent for Treasury bills.