Competitive Tender

Competitive tender is an auction process through which large institutional investors (also called primary distributors) purchase newly issued government debt. The competitive tender process awards securities to the highest bidders; all bids must be submitted by a predetermined date and must be for a minimum of $100,000.

Competitive tender is also called competitive bidding.

Competitive tender is one of two bidding processes for buying new government securities in the primary market (i.e., directly from the government). The other bidding process for buying government securities is non-competitive tender. The U.S. Treasury primarily uses non-competitive tender, while Canada's central bank, the Bank of Canada, primarily uses competitive tender (but also accepts non-competitive bids). Those who receive securities in the competitive tender process may then choose to sell them on the secondary market. Primary distributors may also choose to bid on behalf of smaller customers.

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 from the Treasury. 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 as either competitive or 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. The yield on the bond will be determined by the competitive side of the auction which is handled as a Dutch auction – a type of auction in which the price on an item is lowered until it gets a bid. 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.

Let’s look at an example of how competitive bidding through a Dutch auction works. Suppose the Treasury seeks to raise $9 million in two-year notes with a 5% coupon. Let's assume the competitive bids submitted are as follows:

$1 million at 4.79%

$2.5 million at 4.85%

$2 million at 4.96%

$1.5 million at 5%

$3 million at 5.07%

$1 million at 5.1%

$5 million at 5.5%

The bids with the lowest yield will be accepted first since the issuer will prefer to pay lower yields to its bond investors. In this case, since the Treasury is looking to raise $9 million, it will accept the bids with the lowest yield up to 5.07%. At this mark, only $2 million of the $3 million bid will be approved. All bids above the 5.07% yield will be accepted, and bids below will be rejected. In effect, this auction is cleared at 5.07%, and all successful competitive and non-competitive bidders will receive the 5.07% yield.