What is a Note Auction

A note auction is a formal bidding process that is scheduled on a regular basis by the U.S. Treasury. Currently there are 22 authorized securities dealers, known as primary dealers, that are obligated and allowed to bid on each issue.


Note auction activity by primary partners is the initial step in the process of trading government bonds. All U.S. Treasury notes are originally issued in this manner. These primary dealers are authorized to deal directly with the Federal Reserve System, commonly known as “the Fed.”

These primary dealers are considered trading counterparties who work in conjunction with the New York Fed to implement monetary policy. The primary dealers are expected to bid in all Treasury auctions at fair and reasonably competitive prices.

The primary dealers make the initial purchases of Treasury notes, and then resell and trade these notes to others via the secondary market. The government requires primary dealers to abide by a range of reporting regulations related to their trading activities, including providing data and documentation related to their market activity. This is provided on a sort of honor system basis, as the government generally does not audit the information provided by the dealers.

Note Auction History and Processes

The Federal Reserve Bank of New York established the primary dealer system in 1960. The system initially consisted of 18 primary dealers. This group would expand over the years, reaching a maximum number of 46 primary dealers in 1988. As of November 2010 there were 22 primary dealers. The main factor in the recent decrease in the number of primary dealers is the consolidation of major government securities firms. A host of federal regulations govern the actions and behavior of these primary dealers.

The sale of government securities to the broader market beyond the primary dealers occurs via a process that falls under the oversight of the Open Market Desk of the Federal Reserve Bank of New York. This system is maintained to help drive and guide monetary policy. When government securities are purchased in the secondary market, this adds reserves to the banking system. By contrast, the sale of these securities lowers the reserves.

The amount of money bid by the highest bidder at these auctions will determine the interest rate paid on each issue. The primary dealers have the option of holding, selling or trading their issues after purchase. The demand for Treasury notes by these dealers will vary according to economic and market conditions.