Bond Auctions

[spintron]

Hi all,

Sorry for the newb question, I am trying to understand how bond market auctions work. Can somebody please tell me which of the following two scenarios is really the case

scenario 1
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1. Company X wants to sell bonds B of duration T.
2. Company X puts B in an auction.
3. The bid-asks are about the face value of B, coupon payments are pre-fixed in USD and the reason people quote yields is that they refer to the internal interest rate (eg xirr in excel).
4. If someone buys B today and wants to hold it till maturity, he doesn't care what the yields are because essentially it's the face value that's determined by the auction.


scenario 2
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1. Company X wants to sell bonds B of duration T.
2. Company X puts B in an auction
3. The bid-asks are not about the face value of B but rather about the yield Y_b (? am I getting this wrong?)
4. When bond rates change tomorrow, the buyer of B still gets coupons at the Y_b he bought the bond at.

 

[Rhody Trader]

Scenario 2 is more correct. Corporate bonds don't really auction the same way as sovereign debt does, but the idea holds. Par value is fixed. It's the coupon that is determined during the bidding process.

 

[dribs]

Hey can anyone tell me how and why bond auctions are important for traders of these instruments? Why do bond traders watch out for them and how/why does it effect the market they're trading? Thanks!

 

[dribs]

No one knows?

Maybe if I explain it a little simpler.....what and why would, lets say a Bund trader, or t-note trader, what would he look at and why, as far as bond auctions go, how would it effect those markets? I often hear about bond auction results and sometimes it has an impact and sometimes not, and seeing as I can't find much information on bond auctions and their impact, I thought someone here might know. Come on now, don't be shy

 

[Rhody Trader]

The highest volume and liquidity is in the on-the-run issue, which is the one most recently auctioned. That's why trader's pay so much attention to the auctions. They are the new on-the-run.

 

[dribs]

The highest volume and liquidity is in the on-the-run issue, which is the one most recently auctioned. That's why trader's pay so much attention to the auctions. They are the new on-the-run.

Ok...not sure I'm following, so the government puts up new bonds for auction, and traders of say, the T-note and Bund or something would closely watch this?? How does it effect those markets being traded, if at all?

Thanks for the reply btw!

 

[Martinghoul]

Bond futures are derivatives whose underlying instruments are cash bonds. If futures prices are driven by supply and demand, you'd expect a supply event, such as a bond auction, to have an effect.

 

[dribs]

Ok then, thanks.