Kidwell, Peterson, Blackwell & Whidbee
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Transcript Kidwell, Peterson, Blackwell & Whidbee
Money Market (MM)
• MM is where organizations go to adjust their liquidity.
• Market is a collection of dealers that specialize in one or
more MM instruments.
• Liquidity is stored in the MM by investing in MM
securities (lending). Liquidity is purchased in the MM
by selling MM securities (borrowing).
• Ideal place for temporary investments.
• Short-term debt market.
• Large, wholesale open-market transactions where $1
million is a tiny trade
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Ideal MM Instruments have…
• low default risk.
• short maturity (to have low price risk).
• high marketability (typically facilitated by
standardized features).
By selling in large denominations, per-dollar
transaction costs kept low.
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Typical MM Instruments
typical maturities
U.S. Treasury Bills
Repurchase agreements
13 and 26 weeks
1 to 15 days
Commercial paper
30 to 90 days (270 days max)
Negotiable CDs
12 to 180 days
Fed funds
Banker’s acceptances
1 to 7 days
30 to 180 days
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Auctioning New T-Bills
• Weekly auction by U.S. Treasury of 13-week, and 26week bills. Other bills (e.g., 1-day, 4-week, 52-week) sold
on an as announced basis.
• Sold on a discount basis.
• Sold in multiples of $100.
• $100 million is not a large institutional purchase.
• All winning bidders pay same price which is the price of
the lowest successful bid. Thursday/Monday/Thursday
schedule.
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For Instance, This Past Week’s Schedule
• Thursday (Oct 31), Treasury Department announced
sale of $33 billion of 13-week and $29 billion of 26-week
T-bills, that were auctioned off on Monday (Nov 4).
• Noncompetitive tenders for T-bills due by 11:00 am.
Competitive tenders due by 11:30 am EST (each
Monday).
• Results of auction announced minutes after 11:30 am.
• Bills issued and payments made on Thursday (Nov 7).
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www.treasurydirect.gov/instit/annceresult/press/preanre/2013/2013.htm
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http://www.treasurydirect.gov/RI/OFBills
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http://www.treasurydirect.gov/RI/OFBills
Bid-to-Cover Ratio = 133.2/28.0 = 4.76
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CUSIP Number
Committee on Uniform Security Identification Procedures
A 9-digit alphanumeric identifier, such as
00817Y 10 8
Uniquely identifies each U.S. and Canadian security.
CUSIP system, operated by Standard & Poor’s, but owned
by American Bankers Association, is designed to facilitate
bookkeeping and the settlement of trades.
First 6-characters identify “issuer”
Next two identify “exact issue”
Last is a “check digit”
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Competitive Bids
•
Institutions specify
• quantity
• discount rate (in multiples of .005% such as
2.100%, 2.105%, etc) they are willing to accept.
•
Submitted by dealers & large banks.
•
Treasury Dept. ranks bids according to bank discount
rate, then allocates down the list.
•
Bid-to-Cover Ratio signals how easy it is for Gov’t to
borrow money.
•
No more than 35% of an issue can be sold to any
competitive bidder to ensure a competitive secondary
market.
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Noncompetitive Bids
Small part of offering, all noncompetitive bids
accepted.
$5 million max per noncompetitive bidder.
Noncompetitive bidders specify only
• quantity
• mostly individuals and small banks.
• can purchase online through TreasuryDirect at
www.treasurydirect.gov
• receive the “High Rate” of accepted competitive bid
tenders.
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Book-Entry Securities
• No paper certificates (all new bills issued, held, and
paid for electronically).
• For noncompetitive bidders: Set up TreasuryDirect
account (with bank routing number & bank account
number). Treasury electronically debits your bank
account at beginning & credits it at end.
• Interest on US Treasuries taxed as ordinary income
at the federal level, but not taxed at the state level.
11/14
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Example 1: Overview
offering
competitive ($49.5 B total)
$15.9 B
accepted
$18 B
Tenders with lowest
discount rate bids
accepted
noncompetitive
$2.1 B
$33.6 B
rejected
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Example 1: Auction Process
Offering Amount
$18.0 billion
Competitive tenders
$2.5 billion 3.880%
Noncompetitive tenders
$2.1 billion
$5.0 billion
3.895
$6.0 billion
3.910
Competitive tenders
$49.5 billion
$2.0 billion
3.930
High Rate (highest accepted rate)
3.945%
$4.5 billion
3.945
$9.0 billion
4.290
$11.0 billion
4.305
$9.5 billion
4.315
Bid-to-Cover Ratio
(49.5 + 2.1)/18 = 2.87
Competitive tenders Allocated at High rate
.4/4.5 = 8.89%
Median Rate (of accepted competitive tenders)
3.910%
Low Rate
3.880%
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Secondary Market for T-Bills
discount rates
investment rate
• Bid & Asked are bank discount rates. Bid applies when customer
sells, Asked applies when customer buys.
• Asked Yield is bond equivalent rate.
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Discount Rate
• The (bank) discount rate yd is given by:
Pf P0 360
yd
Pf n
where Pf is face value
P0 is discounted price (today’s price)
n is calendar days to maturity
• Solving for P0 we have
P0 Pf
Pf n yd
360
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Bond Equivalent Rate
•
Bond equivalent rate ybe is given by
ybe
Pf P0 365
P0 n
(note 365 annualizer and discounted price is in
denominator)
•
Solving for P0 we have
Pf
P0
ybe n
1
365
•
Bond equivalent yields are reported to facilitate
comparison against other debt instruments.
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Example 2: Using Bank Discount Rate
Consider a $1,000 T-bill that matures in 133 days whose
Bid and Asked quotes are 4.96 and 4.92, respectively. If
selling, would get
P0 Pf
Pf n yd
360
1000(133)(.0496)
1000
360
$981.67566
If buying, would cost
P0 Pf
Pf n yd
360
1000(133)(.0492)
1000
360
$981.82333
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Example 3: Using Bond Equivalent Rate
Bond Equivalent Rate is same as Investment Rate as on
slides 7 & 17.
Suppose you are contemplating a $1,000 T-bill that
matures in 67 days whose Asked Yield is 5.23. How much
would it cost?
Pf
P0
ybe n
1
365
1000
.0523(67)
1
365
$990.49101
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Fed Funds
• Unsecured loans between banks.
• Overnight interest rate called the fed funds rate.
• Term “fed funds” is misleading.
• Typically done in units of $1 million.
• Yields on fed funds assume 360-day year. Conversion
to bond equivalent yield is as follows.
365
ybe y ff
360
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Commercial Paper
• Review slides 34-36 of Module 2.2.
• Compete head-to-head against T-bills. Consequently,
sold at discount, and quoted using bank discount rate
Pf P0 360
ycp
Pf n
• There is a secondary market.
• Virtually impossible to sell without backup line of
credit and a P-1 or A-1 rating.
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Federal Agencies (GSEs)
Established by Congress for public policy reasons to assure
availability of capital in areas of the economy where credit
might otherwise be insufficient or be too costly.
•
•
•
Farm credit
Home mortgages
Others
They obtain their money to lend out by issuing agency
securities.
Such agency debt qualifies as legal instruments to be held
by banks, insurance companies and pension funds.
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Government Sponsored Enterprises
• Agency (i.e, GSE) debt perceived to have only slightly
greater default risk than US Treasuries.
• Marketability generally very good.
• Government National Mortgage Association (Ginnie Mae)
• Federal National Mortgage Association (Fannie Mae),
Federal Home Loan Mortgage Association (Freddie Mac),
privatized in 1968, 1970, respectively, but still GSEs.
• Note: Student Loan Marketing Association (Sallie Mae)
used to be a GSE. Privatized in 1997. No longer a GSE as
it no longer has any ties to US Government.
• See list on p. 214.
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Retail Certificates of Deposit
• Issued by banks to finance their business activities.
• Not negotiable – no secondary market, can only be
sold back to issuing bank early, with penalty.
• Issued at face value with interest as an “add on”.
• Interest based on a 365 day year.
• Can be in any denomination.
• FDIC insured up to standard amounts.
• Banks typically use standard maturities such as 0.5,
1.0, 1.5, 2.0 and 5.0 years.
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Negotiable Certificates of Deposit
• Large-denomination CDs issued by well-known
banks are negotiable (exists a secondary market for
them).
• Issued at face value with interest as an “add on”.
• Stated interest computed on a 360-day year (like Fed
Funds).
• Interest rates on negotiable CDs are higher than on
T-Bills because of higher credit risk and lower
marketability.
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Negotiable Certificates of Deposit
• Developed by Citibank in 1961, to offset declining
demand deposits (at time banks couldn’t pay interest
on corporate checking accounts) as a way of raising
additional funds.
• Rates often negotiated between buyer and seller.
• Purchased mainly by corporate businesses.
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