Like the majority of sovereigns, the Dutch State uses auctions as a price discovery mechanism in the process of covering its funding need. In 2017, the total borrowing requirement was met by means of 36 auctions. 24 of these auctions were for T-bills (where volumes issued are rolled over several times during the year) and 12 were for bonds. The Dutch State aims for issues to be transparent, predictable and market-based in order to create the best basis for successful auctioning. It uses three different types of auction methods, all offering participants a level playing field.
Dutch Treasury Certificates
In principle, DTCs are auctioned twice a month. However, between October 2008 and January 2009, DTCs were auctioned every week due to the increased funding need. DTC-auctions are single price auctions. This is a unique way of auctioning T-bills in the euro area as most countries use a multi-price auction for T-bills. This auction is internationally known as a ‘Dutch auction’, because of the uniform price. Primary Dealers and Single Market Specialists enter their yield-bids via Bloomberg. Only the DSTA has insight in the book building and decides how much it wishes to allocate at a certain cut-off yield within a pre-announced target range. Nominal bids at an interest rate below the cut-off yield are allotted in full. Nominal bids at an interest rate equal to the cut-off yield can either be allotted in full or in part. This type of auction avoids the so called ‘winner’s curse’. As the DSTA communicates the allocated amounts directly after the auction, uncertainty about the allocation is limited.
Dutch State Loans: DDA
For large initial issues of new longer dated benchmark bonds, the DSTA uses a technique called the Dutch Direct Auction (DDA). This auction method was introduced in 2003 as a means to reach the end investor in a direct way and to enable the DSTA to issue a liquid amount in a new bond at once. The DDA is a rule based system that carries elements from both a syndicate and a Dutch auction. An aspect from the Dutch auction is that there is no winner’s curse thanks to the single price. The book building process, the fact that the DSTA prioritizes some accounts above others (real money versus others) and the fact that the DSTA has Primary Advisors are all elements from a syndicate. End investors can enter their bids via one or more Primary Dealers. The new issue is priced over a benchmark bond, such as a German Bund. For pricing purposes, a spread range is indicated prior to the auction. This range can be updated during the auction, whenever this is warranted by changes in demand or market circumstances. Allocation is based solely on the prices offered, whereas at the cut-off price, real money investors, such as central banks and pension funds, receive priority over other accounts, such as hedge funds and other trading desks. For more information, see subject Dutch Direct Auction.
Dutch State Loans: taps
All DSLs are reopened by means of tap auctions. Tap auctions are also used for initial openings of short-dated bonds (new 3-year bonds). Traditionally, tap auctions are held on the second and if needed on the fourth Tuesday of the month. The DSTA enters a price in the MTS-screen that it can and will adjust depending on market conditions. Primary dealers can hit the price if they think it is attractive. A trade is then made instantly. Once the DSTA reaches the desired amount (specified before the auction through a target range) the auction is closed. In contrast to a Dutch Auction, this is a multiple price auction. The benefit of the tap-method for participants is that they know immediately what amount they have bought, for what price, so that they can hedge the interest rate risk immediately.