On The Assessment of the V-Inverted Shape Pattern for Romanian Government Bond Yields Around Treasury Auctions

In this paper, we intend to provide some theoretical and practical insights on the interdependence between treasury auctions and market yields around auction time. Based on previous research, we investigated the presence of the auction cycle and the corresponding V-inversed pattern of yields in the case of the Romanian sovereign bond market.

Bond Auctions

Each week, billions of dollars (or local currency) of government debt securities are sold in auctions to market participants. Central governments want to use the auction mechanism that minimizes both borrowing costs and chances of market manipulation. A liquid secondary market is also pivotal to the success of the auctions. This chapter begins by providing the definitions, mechanism design, bidding process, and method ranking of government debt auctions with a focus on U.S. Treasury auctions. The next section discusses some important issues including the common value assumption, role of private information, and winner’s curse. Large and active markets coexist before and after the auctions, creating possibilities of a short squeeze. When comparing prices in the pre- or post-auction markets with auction prices, the literature documents positive bidder profits (underpricing) on average.

Competition in Treasury Auctions

We investigate the role of competition on the outcome of Austrian Treasury auctions. Austria’s EU accession led to an increase in the number of banks participating in treasury auctions. We use structural estimates of bidders’ private values to examine the effect of increased competition on auction performance. We find robust evidence that bidders’ surplus dropped sharply after EU accession, but less than reduced form estimates would suggest. The difference can be explained by reduced form estimates not taking into account the increase in valuations upon EU accession. (JEL D44, E63, G21, H63)