Author: Kenneth D. Garbade

• Since 1976, the U.S. Treasury has made coupon-bearing securities available through auction sales. This format is generally considered a more efficient and less costly alternative to the use of fixed-price offerings: the Treasury's method of issuing notes and bonds prior to 1970.
• The Treasury was no stranger to securities auctions before 1970—it had a solid track record of making bills available in this format. However, two earlier attempts to auction long-term bonds—in 1935 and 1963—had failed. The dilemma facing the Treasury in 1970 was how to introduce an effective program of regular auction sales of notes and bonds.
• This article observes that the 1970-75 period was a milestone in the evolution of the Treasury market. During the period, the Treasury made the important transition from fixed-price offerings of notes and bonds to market-driven auctions of these securities.
• Author Garbade offers three key reasons for why the Treasury was able to move the primary market for coupon-bearing securities to a more efficient configuration in the early 1970s:
• By closely imitating its well-established bill auction process, the Treasury gave dealers a familiar starting point for developing the risk management and sales programs needed to support auction bidding for notes and bonds.
• The Treasury announced auctions for securities of gradually increasing maturity, instead of immediately auctioning long-term bonds, like it did in 1935 and 1963. As a result, dealers had sufficient time to build up their risk management and sales programs.
• The Treasury was willing to alter the auction process when shortcomings appeared—rather than jettison the entire effort, as it did in its two failed attempts.
• Garbade also points to the broader implications of the Treasury's efforts. He explains that the mere prospect of greater efficiency may not effect change that requires many actors to alter familiar behavior patterns; change can also depend on following a path that facilitates learning and implementation of new patterns. According to the author, the Treasury accomplished its objectives in the early 1970s because it enabled dealers to learn gradually about how to participate in note and bond auctions, and because it too was willing to learn from experience.

Kenneth D. Garbade is a vice president at the Federal Reserve Bank of New York.

The views expressed in this summary are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.