Origin of US Treasury Bill Market

OK, this is way off topic. I admit that freely. But I really enjoyed the paper by Kenneth D. Garbade recently published by the New York Fed: Why the US Treasury Began Auctioning Treasury Bills in 1929:

The U.S. Treasury began auctioning Treasury bills in 1929 to correct several flaws in the post-war structure of Treasury financing operations. The flaws included underpricing securities sold in fixed-price subscription offerings, infrequent financings that necessitated borrowing in advance of need, and payment with deposit credits that gave banks an added incentive to oversubscribe to new issues and contributed to the appearance of weak post-offering secondary markets for new issues.

All three flaws could have been addressed without introducing a new class of securities. For example, the Treasury could have begun auctioning certificates of indebtedness (instead of bills), it could have begun offering certificates between quarterly tax dates, and it could have begun selling certificates for immediately available funds. However, by introducing a new class of securities, the Treasury was able to address the defects in the existing primary market structure even as it continued to maintain that structure. If auction sales, tactical issuance, and settlement in immediately available funds proved successful, the new procedure could be expanded to notes and bonds. If subsequent experience revealed an unanticipated flaw in the new procedure, however, the Treasury was free to return to exclusive reliance on regularly scheduled fixed-price subscription offerings and payment by credit to War Loan accounts. The introduction of Treasury bills in 1929 gave the Treasury an exit strategy—as well as a way forward—in the development of the primary market for Treasury securities.

I also found the following to be amusing:

Bidding on a price basis insulated the Treasury from specifying how bids in terms of interest rates would be converted to prices. Market participants used a variety of conventions. For example, the price of a bill with n days to maturity quoted at a discount rate of D is P = 100 – (n/360)×D. The price of the same bill quoted at a money market yield of R is P = 100/[1+.01×(n/360)×R]. In the case of a ninety-day bill quoted at 4.50 percent, P = 98.875 if the quoted rate is a discount rate, that is, if D = 4.50 percent, and P = 98.888 if the quoted rate is a money market yield, that is, if R = 4.50 percent.

Some things never change!

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