DEFINITION of Non-Competitive Tender

A non-competitive tender is a bid made by a small investor to purchase a debt issue which has its price based on the average price of all competitive tenders submitted. It is a method of distribution used primarily by the U.S. Treasury and is one of the two bid processes for buying debt issues – non-competitive tender is for small investors, while competitive tender is for large institutional investors.

A non-competitive tender is also known as a non-competitive bid.

Understanding a Non-Competitive Tender

The U.S. Treasury holds weekly and monthly auctions to sell Treasury securities – Treasury bills, notes, bonds, and Treasury Inflation-Protected Securities (TIPS) – to the public. Interested parties typically place bids for the price and amount of debt securities they are willing to purchase. Bids are accepted up to 30 days in advance of the auction and may be submitted either electronically through the Treasury Automated Auction Processing System (TAAPS) or by mail. The bids are confidential and kept sealed until the auction date. Participants in any Treasury auction consist of small investors and institutional investors who submit bids categorized into competitive as non-competitive tenders.

Non-competitive tenders are submitted by smaller investors who are guaranteed to receive securities. However, there is no guarantee on the price or yield received. Each non-competitive bidder is limited to purchases of $5 million per auction. The minimum non-competitive tender for a Treasury bill, for example, is $10,000, and these are usually made through a Federal Reserve Bank or a commercial bank. The yield on the bond will be determined by the competitive side of the auction which is handled as a regular dutch auction. A competitive tender is a bid submitted by bigger investors, such as institutional investors. Each bidder is limited to 35% of the amount of the offering per auction. Each bid submitted specifies the lowest rate, yield, or discount margin that the investor is willing to accept for the debt securities. (Read this Treasury Direct article for detailed information on how individuals investors can participate in the Treasury Direct market with a minimum $100 investment.)

As there is an inverse relationship between yield and price, the lower the yield the higher the price bid. The bids with the lowest yield will be accepted first since the issuer will prefer to pay lower yields to its bond investors. The lowest yield / highest price which meets the supply of debt being sold serves as the winning yield, after all non-competitive bids have been subtracted from the total amount of securities offered. All investors who bid at or above the level of the winning yield receive securities with this yield. In other words, all bidders, competitive and non-competitive, will receive this yield. (Read this Dutch Auction article for detailed information on how this process works).

On issue day, Treasury delivers securities to non-competitive bidders who made their submissions in a particular auction. In exchange, Treasury charges the accounts of those bidders for payment of the securities. The final price, discount rate, and yield is released to the public within two hours of the auction close.