Note Auction

Think of it like a fantasy sports draft. Only instead of you buying the fake services of Tom Brady or Aaron Rodgers, this process involves large banks buying U.S. treasury notes.

The U.S government sells its debt through a note auction. It's the formal process the Treasury Department goes through to raise money via a debt issue. The government doesn't sell directly to retail customers, i.e. you can't just wander into a note auction and start barking out bids (we aren't selling prize hogs here). Instead, the government sells to a set of large banks and other major financial institutions. These companies are called "primary dealers."

In the auction, these primary dealers put in bids for how much debt they want to buy and what interest rates they want to receive (it's not a live auction with some person waiving a gavel and talking really fast). The government then takes these bids and finds the interest rate level that allows them to sell the full amount of debt they are looking to sell. Then everybody gets that rate.

Monocle Bank bids for $2 billion worth of 10-year notes at a rate of 2.125%, and GloboFunds Inc. bids for $3 billion worth of 10-year notes at 2.155%. The government wants to sell $5 billion in notes. So it sells the securities with a rate of 2.155%...$2 billion worth to Monocle and $3 billion worth to GloboFunds. Both banks get the bonds at the rate of 2.155% (even though Monocle was willing to take the lower rate of 2.125%). Thus, each note issuance has the same rate, yield, and discount margin across the board, even if some of the individual bids would have actually meant a better deal for the government.