Auction Cycles in the U.S. Treasury Bond Market: Phenomena and Causes

Abstract

Previous research has revealed the existence of auction cycles in the US Treasury market from the 1980s up to 2008. In this paper, I find that these auction cycles have continued to persist, and in fact have intensified, since the 2008 financial crisis. I show that part of these auction cycles, namely the post-auction decrease in secondary market yields, is influenced by the bid-to-cover ratio outcome of the auction, where a larger bid-to-cover ratio produces a larger post-auction yield decrease. I rationalize this effect as the result of the bid-to-cover ratio serving as an indicator of investor demand for the new security offering. In addition, I find that this effect is amplified during periods of high volatility, which is consistent with my earlier finding that auction cycles have intensified since the 2008 financial crisis, due to the abnormally high market volatility during the crisis and immediately after.