Non-Competitive Tender

What Is a Non-Competitive Tender?

A non-competitive tender is an offer to buy United States Treasury securities that is made by non-institutional investors. These smaller investors do not participate in a formal auction for the securities but instead accept the market price set by other participants. By contrast, competitive tender offers are those made by large institutional buyers who collectively set the price of Treasury securities through a Dutch auction process.

How Non-Competitive Tenders Work

The United States Treasury sells trillions of dollars of securities every year. The buyers of these securities range from large organizations, such as primary dealer banks and foreign governments, to individual retail investors. Rather than negotiating with all of these buyers directly, the Treasury instead holds regular auctions with certain large buyers and then uses the price set by those auctions to sell securities to smaller investors.

In 2019, the Treasury held 322 auctions through which it issued almost $12 trillion in securities. At these auctions, large institutional buyers place their bids for the price and amount of Treasury securities they wish to purchase. The Treasury, wishing to pay the lowest amount of interest possible on its debts, first accepts the bids with the lowest yields and then gradually accepts more expensive offers until it has raised the quantity of funds it requires. Through this competitive bidding process, the Treasury determines the fair market value of its securities and then sells additional securities to non-institutional buyers at that market price.

There are several advantages associated with purchasing Treasury securities through non-competitive tenders. Using non-competitive tenders can allow small investors to purchase securities without paying expensive brokerage fees, such as by using the government-run Treasury Direct platform. Using non-competitive tenders can also assure investors that they will receive a fair price on their investment, since the price they receive is set by the real trading activity of large institutional buyers. The requirements for investing using non-competitive tenders are also relatively modest, with a minimum offer size of only $10,000 and a maximum of $500,000.

Example of a Non-Competitive Tender

Using the Dutch auction process, the Treasury would begin by offering securities at a very low yield (one which it suspects will be too low to attract any bids from the auction participants). Then, they would gradually raise the offered yield until it begins attracting offers and would keep doing so until the total number of bids made has been sufficient to absorb all of the securities the Treasury wishes to sell. 

The participants in this auction process would be institutional buyers, and their offers would be considered competitive tenders. Once the Treasury has received the desired quantity of tenders, all of the auction participants who submitted winning bids will be able to purchase their securities at the higher yield associated with the last successful bid. 

For example, if an investor with a successful bid was willing to purchase securities at a yield of only 0.10%, and if the last investor to issue a successful bid offered to purchase at a yield of 0.30%, then all of the investors with successful bids would be paid the higher yield of 0.30%, even if they were initially willing to accept lower yields. That final yield, 0.30%, would then apply to any non-competitive tenders offered by non-institutional investors. In this manner, the competitive bidding process of the institutional buyers sets the price received by the smaller buyers who use non-competitive tenders.