The History of the T-Bill Auction

How this Treasury security became a cornerstone of world markets

Fact checked by Kirsten Rohrs SchmittReviewed by Michael J BoyleFact checked by Kirsten Rohrs SchmittReviewed by Michael J Boyle

After World War I, the U.S. national debt surged to about $22 billion. This financial burden was compounded by new income tax rates, including a war surtax, with top rates reaching 73%, though those soon came down significantly. The government struggled to manage its debt through traditional means, such as wartime Liberty and Victory bonds and short-term debt instruments called certificates of indebtedness.

The U.S. Department of the Treasury faced a critical challenge: It couldn’t pay out more in interest than it received through income taxes, especially when public sentiment favored cuts in the tax rates. These pressures ultimately led to the first T-bill auction in 1929, marking a significant shift in government finance.

From handwritten bids to high-speed electronic trading, the evolution of the T-bill auction reflects the broader transformation of financial markets in the 20th and 21st centuries. The T-bill auction’s history is intertwined with major economic events, technological advances, and shifts in U.S. and global monetary policy.

Key Takeaways

• Treasury bills (T-bills) were introduced in 1929, with regular auctions to issue them coming on board shortly afterward to help finance government operations during the Great Depression.
• The auction process has evolved from manual, in-person bidding to a sophisticated electronic system.
• T-bill auctions play a crucial role in setting short-term interest rates and serve as a benchmark for other financial instruments in the U.S. economy.
• The U.S. Federal Reserve uses T-bill auctions to help it carry out its monetary policy, influencing the size of the money supply and short-term interest rates.
• Changes in auction formats and rules over time reflect efforts to improve market efficiency, prevent manipulation, and ensure fair access for all participants.

The Birth of T-Bill Auctions

The story of T-bill auctions begins in the tumultuous economic landscape of the late 1920s. The U.S. Treasury lacked the authority to change government financial structures or introduce new ones. So, formal legislation was signed by then-President Herbert Hoover to create a new security with new market arrangements.

Zero-coupon bonds were proposed with up to one-year maturities. These bonds would become known as Treasury bills because of their short-term nature. Unlike longer-term bonds, T-bills were sold at a discount to their face value, with the difference representing the interest earned by investors.

The legislation changed the Treasury’s fixed-price subscription offerings to an auction system based on competitive bids to ensure the lowest market rates. All deals would be settled in cash, and the government could sell T-bills when funds were needed. During the first offering, at the end of 1929, the U.S. Treasury issued its first 13-week bills.

The structure of T-bill auctions was established shortly after their introduction and became a regular occurrence in the early 1930s. In 1930, the government sold bills at auctions in the second month of every quarter to limit borrowing and cut interest costs. All four auctions in 1930 saw buyers refinance with newer bills. By 1934, because of the success of past bill auctions, certificates of indebtedness were eliminated. By the end of 1934, T-bills were the only form of short-term financing left for the government.

In 1935, then-President Franklin Delano Roosevelt signed legislation allowing the government to issue Series HH, EE, and I bonds, including so-called baby bonds, as a further means for the United States to raise funds.

The timing was crucial: The Great Depression had created an unprecedented need for government funding to support various relief and recovery programs. The auctions provided a systematic way for the Treasury to sell these securities to banks, financial institutions, and other investors.

Originally, bids were submitted in person or by mail, often handwritten on standardized forms. Treasury officials would manually sort through these bids, accepting those offering the lowest yield (the highest price) until the necessary funds were raised.

Note

In 2012, Swiss authorities found massive amounts of fake U.S. Treasury “bonds”—supposedly dated to 1934, when the U.S. government only issued the T-bill—stored in trunks and safety security boxes at a Zurich trust company. They had arrived from Hong Kong five years earlier and were worth about a third of all U.S. debt, or $6 trillion, at the time. Italian police said this was part of a string of mafia scams involving billions of “bonds” used as security for different lines of credit to fraudsters who would take the money and disappear.

The impact of World War II

As the government’s funding needs surged to support the war effort during World War II, the volume and frequency of T-bill auctions increased dramatically. During this period, there was a significant expansion in the base of investors wanting T-bills since the government encouraged citizens to show their patriotism by investing in them through its war bond drives.

The war years also brought about changes in the auction process. To handle the increased volume, the Treasury began to streamline its procedures, introducing more standardized bidding forms and developing more efficient methods for processing them.

Note

In the 1980s, there was a vast increase in sophisticated forgeries of U.S. Treasurys and other Treasury checks that could fool even experienced bank tellers. This led the Treasury to put new security features in place, including watermarks and embedded threads, making T-bills some of the most secure financial documents in the world.

Post-war evolution

In the 1950s and 1960s, there was a gradual shift toward a more professional investor base, with banks and financial institutions playing an increasingly prominent role in the auctions. This period also saw the beginning of academic interest in auction theory, with economists starting to analyze the efficiency of different auction formats.

One significant development during this era was the introduction of the “multiple-price” auction format in 1947. Under this system, successful bidders paid their bid price, rather than a uniform price for all accepted bids. The change encouraged more aggressive bidding and potentially lowered government borrowing costs.

As the financial markets grew more sophisticated, so did the T-bill auction system. By the 1970s, the auctions had become a critical part of the U.S. financial system, not just for government financing but also for setting benchmark short-term interest rates for financial transactions.

Today, the U.S. government holds market auctions on different days depending on the type of T-bill. For example, four-week and eight-week bills are offered each week, with the offering announced on Tuesday and the bills auctioned on Thursday. Meanwhile, 13-week and 26-week bills are offered each week, with the offering announced on Thursday and the bills auctioned the following Monday. And 52-week bills are offered every four weeks, with auctions taking place on Tuesdays.

How Does the T-Bill Auction Work Today?

Every quarter, the Treasury announces its estimates for how much debt it will be auctioning over the next six months. This can influence interest rates. For example, a higher-than-expected prediction can cause rates to climb.

The Treasury also publishes a tentative auction schedule. Auctions happen on different days of the week depending on the type of T-bill. Bills range in maturity from four weeks to as many as 52 weeks.

During an auction, the Treasury first accepts noncompetitive bids. Individuals, corporations, and other investors agree to buy a certain value of bills at the rate, yield, or margin determined at auction.

Note

During the 2011 debt ceiling crisis, the U.S. came so close to defaulting on its T-bill obligations that the Treasury was reportedly preparing to use a lottery system to determine which bondholders would be paid if the government couldn’t meet all its obligations. This unprecedented situation highlighted the critical role of T-bills in global finance given that even a hint of default caused significant market turmoil.

After the noncompetitive bids, the Treasury accepts competitive bids until the set amount of bills is sold. Competitive bids specify the rate, yield, or discount margin you’re willing to accept. For example, you might submit a bid saying you’re willing to buy a 26-week T-bill at a 5% yield. Others might demand a higher yield or accept a lower yield.

The Treasury will start filling bids starting with the lowest offered yield until all available bills are sold. All successful bidders, including noncompetitive bidders, receive the same rate, yield, or discount, which is equal to whatever the rate, yield, or discount of the highest accepted bid.

Who Buys T-Bills at Auction?

Most T-bills are purchased by institutional investors, foreign monetary entities, and other large entities. Individual investors can also buy T-bills at auction.

When Do T-Bill Auctions Happen?

T-bill auctions happen on a schedule announced by the Treasury. There are auctions on Mondays, Tuesdays, Wednesdays, and Thursdays, depending on the type of bill.

How Can I Find Out When an Auction Will Take Place?

The Treasury publishes a schedule of future auctions. You can also subscribe to alerts via email about future auction dates.

How Can I Buy T-Bills at Auction?

Many brokerages and financial institutions sell T-bills and other government securities at auction. You can also use the TreasuryDirect platform to participate directly in auctions.

The Bottom Line

From its inception in 1929 as a response to post-World War I debt challenges to its present status as a cornerstone of global financial markets, the T-bill auction has been adapted to meet the changing needs of the government and investors. This process has provided the U.S. Treasury with a reliable mechanism for short-term borrowing and established a benchmark for short-term interest rates that greatly affects financial transactions worldwide.

Introduced as part of a broader effort to stabilize the economy, T-bills provide a secure, low-risk financial product for individual and institutional investors. Over time, T-bills became widely accepted as a benchmark for the risk-free rate of return in the financial world, given their backing by the U.S. government.

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